<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 13, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933/X/
POST-EFFECTIVE AMENDMENT NO. 16
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940/X/
AMENDMENT NO. 17
(CHECK APPROPRIATE BOX OR BOXES)
NATIONWIDE MUTUAL FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
NATIONWIDE MID CAP GROWTH FUND
NATIONWIDE GROWTH FUND
NATIONWIDE FUND
NATIONWIDE S&P 500 INDEX FUND
NATIONWIDE BOND FUND
NATIONWIDE TAX-FREE INCOME FUND
NATIONWIDE LONG-TERM U.S. GOVERNMENT BOND FUND
NATIONWIDE INTERMEDIATE U.S. GOVERNMENT BOND FUND
NATIONWIDE MONEY MARKET FUND
NATIONWIDE FOCUS FUND
NATIONWIDE SMALL CAP VALUE FUND II
NATIONWIDE HIGH YIELD BOND FUND
NATIONWIDE SMALL CAP INDEX FUND
NATIONWIDE MID CAP INDEX FUND II
NATIONWIDE INTERNATIONAL INDEX FUND
NATIONWIDE BOND INDEX FUND
MORLEY CAPITAL ACCUMULATION FUND
MORLEY ENHANCED INCOME FUND
PRESTIGE LARGE CAP VALUE FUND
PRESTIGE LARGE CAP GROWTH FUND
PRESTIGE SMALL CAP FUND
PRESTIGE BALANCED FUND
PRESTIGE INTERNATIONAL FUND
THE AGGRESSIVE FUND
THE MODERATELY AGGRESSIVE FUND
THE MODERATE FUND
THE MODERATELY CONSERVATIVE FUND
THE CONSERVATIVE FUND
THREE NATIONWIDE PLAZA
COLUMBUS, OHIO 43216
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (614) 249-7855
SEND COPIES OF COMMUNICATIONS TO:
MS. ELIZABETH A. DAVIN
DIETRICH, REYNOLDS AND KOOGLER
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(NAME AND ADDRESS OF AGENT FOR SERVICE)
It is proposed that this filing will become effective:
[X] On February 10, 1999 pursuant to paragraph (a) (1) of Rule 485.
<PAGE> 2
Explanatory Note
This filing includes Prospectus for The Nationwide Small Cap Index Fund, the
Nationwide Mid Cap Index Fund II, the Nationwide International Index Fund and
the Nationwide Bond Index Fund and the Statement of Additional Information for
the funds listed above as well as for the Aggressive Fund, the Moderately
Agressive Fund, the Moderate Fund, the Moderately Conservative Fund and the
Conservative Fund.
The Prospectus for the Agressive Fund, the Moderately Agressive Fund, the
Moderate Fund, the Moderately Conservative Fund and the Conservative Fund as
well as the Prospectuses and Statements of Additional Information for the Mid
Cap Growth Fund, Growth Fund, Nationwide Fund, Bond Fund, Tax-Free Income Fund,
Long-Term U.S. Government Bond Fund, Intermediate U.S. Government Bond Fund, and
Money Market Fund-Prime Shares Prestige Large Cap Value Fund, Prestige Large Cap
Growth Fund, Prestige Small Cap Growth Fund, Prestige Balanced Fund, Prestige
International Fund, Nationwide, Morley Capital Accumulation Fund, the Morley
Enhanced Income Fund, High Yield Bond Fund, Focus Fund, Small Cap Value Fund II,
are included in Post-Effective Amendment Nos. 13 and 14 and are incorporated by
reference into this filing of Post-Effective Amendment No. 15 to the
Registration Statement.
<PAGE> 3
DRAFT 12/8/99
PROSPECTUS
______________, 2000
NATIONWIDE MUTUAL FUNDS
NATIONWIDE SMALL CAP INDEX FUND
NATIONWIDE MID CAP INDEX FUND II
NATIONWIDE INTERNATIONAL INDEX FUND
NATIONWIDE BOND INDEX FUND
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these Funds' shares as an investment or determined
whether this prospectus is complete or accurate. To state otherwise is a crime.
<PAGE> 4
TABLE OF CONTENTS
FUND SUMMARIES........................................................1
Nationwide Small Cap Index Fund..............................1
Nationwide Mid Cap Index Fund II ............................5
Nationwide International Index Fund..........................8
Nationwide Bond Index Fund...................................11
MORE ABOUT THE FUNDS..................................................15
INVESTMENT RISKS......................................................19
MANAGEMENT............................................................25
BUYING, SELLING AND EXCHANGING FUND SHARES............................27
DISTRIBUTIONS AND TAXES...............................................38
ADDITIONAL INFORMATION................................................Back Cover
-i-
<PAGE> 5
FUND SUMMARIES
This Prospectus provides information about four of the Nationwide Mutual Funds:
Nationwide Small Cap Index Fund, Nationwide Mid Cap Index Fund II , Nationwide
International Index Fund and Nationwide Bond Index Fund (together the "Funds").
"You" and "your" refer to potential investors and current shareholders of one or
more of the Funds.
This section summarizes key information about the Funds. Use these summaries to
compare the Funds with other mutual funds. More detailed information about the
risks and investment techniques of each Fund can be found in "MORE ABOUT THE
FUNDS."
A QUICK NOTE ABOUT SHARE CLASSES
Each Fund has three different share classes -- Class A, Class B and
Institutional Class. The fees, sales charges and expenses for each share class
are different, but each share class of a particular Fund represents an
investment in the same assets of that Fund.
The fees and expenses for each Fund are set forth in the Fund Summaries. For
more information about which share class is right for you, see "BUYING, SELLING
AND EXCHANGING FUND SHARES -- Choosing a Share Class."
ABOUT EACH FUND GENERALLY
Each Fund employs a "passive" management approach, attempting to invest in a
portfolio of assets whose performance is expected to match approximately the
performance of that Fund's index. Each Fund will be substantially invested in
securities in the applicable index, and will invest at least 80% of its assets
in securities or other financial instruments in, or correlated with, the
applicable index. A Fund may change its target index if Fund management believes
a different index would better enable the Fund to match the performance of the
market segment represented by the current index.
Each Fund invests all of its assets in a Series of Quantitative Master Series
Trust that has the same goals as the Fund. All investments will be made at the
level of the Series. This structure is sometimes called a "master/feeder"
structure. Each Fund's investment results will correspond directly to the
investment results of the underlying Series it invests in. For simplicity, this
Prospectus uses the term "Fund" to include the underlying Series a Fund invests
in. There is no guarantee that the Funds will achieve their objectives.
NATIONWIDE SMALL CAP INDEX FUND
OBJECTIVE AND PRINCIPAL STRATEGIES
The Fund seeks to match the performance of the Russell 2000 Index (the "Russell
2000") as closely as possible before the deduction of Fund expenses. The Russell
2000 is a market-weighted index composed of approximately 2,000 common stocks
issued by smaller-capitalization U.S. companies in a wide range of businesses.
<PAGE> 6
Market capitalization is a common way to measure the size of a company based on
the price of its common stock; it is simply the number of outstanding shares of
the company multiplied by the current share price. [Inset Box]
Market-weighted index is an index in which the weighting of each security is
based on its market capitalization. In a market-weighted index, changes in the
price of a company with a large capitalization affect the level of the index
more than changes in the price of a company with smaller market capitalization.
[Inset Box]
The Small Cap Index Fund invests in a statistically selected sample of stocks
included in the Russell 2000 and in derivative instruments linked to the Russell
2000. The Fund may not invest in all of the common stocks in the Russell 2000,
or in the same weightings as in the Russell 2000. The Fund chooses investments
so that the market capitalizations, industry weightings and other fundamental
characteristics of the stocks and derivative instruments chosen are similar to
the Russell 2000 as a whole. The Fund may also engage in securities lending.
PRINCIPAL RISKS
As with any mutual fund, the value of the Fund's investments -- and therefore
the value of the Fund's shares -- may go up or down. And because the value of
your investment in the Fund will fluctuate, there is the risk that you will lose
money. Individual stocks and other equity investments in the Small Cap Index
Fund - as well as the stock market as a whole -- could lose value. Individual
stocks can lose value if investors lose confidence in a company's ability to
grow or sustain profits. Investor confidence in stocks, economic developments in
the U. S. and foreign countries, interest rate changes and other factors can
also affect the broader stock market.
Typically, stocks are more volatile than bonds.
The Fund is also subject to selection risk, which is the risk that the Fund's
investments, which may not fully replicate the index, may perform differently
from the securities in the index. The Fund will attempt to be fully invested at
all times and will not hold a significant portion of its assets in cash. The
Fund will generally not attempt to hedge against adverse market movements.
Therefore, the Fund might go down in value more than other mutual funds in the
event of a general market decline. In addition, an index fund has operating and
other expenses while an index does not. As a result, while the Fund will attempt
to track the Russell 2000 as closely as possible, it will tend to underperform
the index to some degree over time.
The Fund is a non-diversified fund, which means that it may invest more of its
assets in fewer companies than if it were a diversified fund. By concentrating
more assets in a smaller number of investments, the Fund's risk is increased
because some investments have a greater effect on the Fund's performance. This
helps the Fund's performance when its investments are successful, but also hurts
the Fund's performance when its investments are unsuccessful.
PERFORMANCE
The following bar chart and table show two aspects of the Fund: volatility and
performance. The bar chart shows the volatility -- or variability -- of the
Fund's annual total returns over time and shows that fund performance can change
from year to year. The table shows the Fund's average annual total returns for
certain time periods compared to the returns of a broad-based securities index.
The bar chart and table provide some indication of the risks of investing in the
Fund. Remember, however, that past performance does not guarantee similar
results in the future.
Annual Returns - Nationwide Small Cap Index Fund
[add bar chart here]
Best Quarter: ___% ___ qtr of 19__ Worst Quarter: ___% ___ qtr of 19__
Average annual returns - as of December 31, 1998 (1)
<TABLE>
<CAPTION>
One Year Since Inception (2)
-------- -------------------
<S> <C> <C>
The Fund - Class A shares ____% ____%
The Fund - Class B shares ____% ____%
The Fund - Institutional Class shares ____% ____%
[INDEX] (3) ____% ____%
</TABLE>
Such fees and expenses will be in addition to the fees and expenses borne by the
Series. Therefore, had the Fund been invested in the Series for the time periods
indicated, its performance would have been less because of the additional fees
and expenses incurred at the Fund level.
(1) These returns reflect performance after sales charges (for Class A and
Class B shares) and expenses are deducted, and include the performance of
the Series prior to commencement on December __, 1999.
(2) The Series began operation on ___________, 199_. These returns include
performance based on the Series, which was achieved prior to the creation
of the Fund (12/__/99). The returns have been restated for the sales
charges but not for fees applicable to each class of the Fund. Had the Fund
been in existence for the time periods presented, the performance of each
class of the Fund would have been lower as a result of their additional
expenses.
(3) The ____________ is an unmanaged index _____________________. These returns
do not include the effect of any sales charges or expenses. If sales
charges and expenses were deducted, the actual return of this Index would
be lower.
-2-
<PAGE> 7
FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY WHEN BUYING AND
HOLDING SHARES OF THE SMALL CAP INDEX FUND.
<TABLE>
<CAPTION>
Shareholder Fees(1) Class A Shares Class B Shares Institutional
-------------- -------------- -------------
Class Shares
------------
<S> <C> <C> <C>
(paid directly from your
investment)
Maximum Sales Charge (Load) 5.75%(2) None None
imposed upon purchases
(as a percentage of offering price)
Maximum Deferred Sales Charge None(3) 5.00%(4) None
(Load) imposed on redemptions
(as a percentage of original purchase
price or sale proceeds, as applicable)
Annual Fund Operating Expenses
(deducted from Fund assets)(5)
Management Fees(6) 0.08% 0.08% 0.08%
Distribution and/or Service
(12b-1) Fees(7) 0.25 1.00 None
Other Expenses(8) 1.09 0.94 0.84
---- ------ ----
Total Annual Fund
Operating Expenses(9) 1.42% 2.02% 0.92%
==== ====== ====
</TABLE>
(1) If you buy and sell shares through a broker or agent, they may also charge
you a transaction fee.
(2) As the amount of your investment increases, the sales charge imposed on the
purchase of Class A shares decreases. For more information, see "BUYING, SELLING
AND EXCHANGE FUND SHARES -- Buying Shares -- Class A sales charges."
(3) A contingent deferred sales charge (CDSC) of up to 1% may be imposed on
certain redemptions of Class A shares purchased without a sales charge.
(4) A CDSC ranging from 5% to 1% is charged when you sell Class B shares within
the first six years of purchase. Class B shares are converted to Class A shares
after you have held them for seven years. See "Buying, Selling and Exchanging
Shares - Selling Shares - Contingent deferred sales charge (CDSC) on Class A and
Class B shares."
(5) Fees and expenses include the expenses of both the Fund and the Fund's pro
rata share of the expenses of the Series it invests in.
(6) Paid by the Series. The investment adviser of the Series has entered into
contractual arrangements to provide that the management fee for the Series, when
combined with administrative fees of certain funds that invest in the Series,
will not exceed specific amounts.
-3-
<PAGE> 8
As a result of these contractual arrangements, the investment adviser of the
Series currently receives a management fee of 0.01%.
(7) Paid by the Fund.
(8) Because the Fund is new and does not yet have any operating history, "Other
Expenses" are based upon estimates for the current fiscal year. "Other Expenses"
include transfer agent, fund accounting and administration fees and expenses
paid by the Funds and fund accounting fees and expenses paid by the Series.
(9) At least through ______________, 2000, Villanova SA Capital Trust ("VSA")
has agreed to waive fees or otherwise reimburse expenses for the Fund so that
the Total Annual Operating Expenses will not exceed 0.79% for Class A shares,
1.54% for Class B shares and 0.54% for Institutional Class shares. This waiver
of fees and reimbursement of expenses is subject to a possible reimbursement of
VSA by the Fund within five years of the Fund's commencement of operations if
the reimbursement by the Fund can be implemented within the annual expense
limitations described above.
EXAMPLE
THIS EXAMPLE SHOWS WHAT YOU COULD PAY IN EXPENSES OVER TIME. YOU CAN ALSO USE
THIS EXAMPLE TO COMPARE THE COSTS OF THIS FUND WITH OTHER MUTUAL FUNDS.
THE EXAMPLE ASSUMES THAT YOU INVEST $10,000 IN THE FUND FOR THE TIME PERIODS
INDICATED AND THEN SELL ALL OF YOUR SHARES AT THE END OF THOSE PERIODS. IT
ASSUMES A 5% RETURN EACH YEAR AND NO CHANGES IN EXPENSES. ALTHOUGH YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER, BASED ON THESE ASSUMPTIONS YOUR COSTS WOULD BE:
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
Class A Shares $653 $819
Class B Shares $698 $912
Institutional Class Shares $___ $___
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
Class B Shares $198 $210
</TABLE>
-4-
<PAGE> 9
THE NATIONWIDE MID CAP INDEX FUND II
OBJECTIVE AND PRINCIPAL STRATEGIES
The Fund seeks to match the performance of the Standard & Poor's Mid Cap 400
Index (the "S&P 400")* as closely as possible before the deduction of Fund
expenses. The S&P 400 is composed of 400 common stocks issued by U.S.
mid-capitalization companies in a wide range of businesses. The S&P 400 is a
market-weighted index and is generally considered broadly representative of the
performance of publicly traded U.S. mid-capitalization stocks.
The Mid Cap Index Fund II invests in the common stocks represented in the S&P
400 in roughly the same proportions as their weightings in the S&P 400. The Fund
may also invest in derivative instruments linked to the S&P 400. The Fund may
not invest in all of the common stocks in the S&P 400, or in the same weightings
as in the S&P 400. At those times, the Fund chooses investments so that the
market capitalizations, industry weightings and other fundamental
characteristics of the stocks and derivative instruments chosen are similar to
the S&P 400 as a whole. The Fund may also engage in securities lending.
PRINCIPAL RISKS
As with any mutual fund, the value of the Fund's investments -- and therefore
the value of the Fund's shares -- may go up or down. And because the value of
your investment in the Fund will fluctuate, there is the risk that you will lose
money. Individual stocks and other equity investments in the Mid Cap Index Fund
II - as well as the stock market as a whole -- could lose value. Individual
stocks can lose value if investors lose confidence in a company's ability to
grow or sustain profits. Investor confidence in stocks, economic developments in
the U. S. and foreign countries, interest rate changes and other factors can
also affect the broader stock market. Typically, stocks are more volatile than
bonds.
The Fund is also subject to selection risk, which is the risk that the Fund's
investments, which may not fully replicate the index, may perform differently
from the securities in the index. The Fund will attempt to be fully invested at
all times and will not hold a significant portion of its assets in cash. The
Fund will generally not attempt to hedge against adverse market movements.
Therefore, the Fund might go down in value more than other mutual funds in the
event of a general market decline. In addition, an index fund has operating and
other expenses while an index does not. As a result, while the Fund will attempt
to track the S&P 400 as closely as possible, it will tend to underperform the
index to some degree over time.
- ----------
* "Standard & Poor's", "S&P", "S&P 400", "Standard & Poor's 400", and "400" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by
the Fund. The Fund is not sponsored, endorsed, sold or promoted by Standard &
Poor's and Standard & Poor's makes no representation regarding the advisability
of investing in the Fund. For further information regarding the trademark
licenses, see the Statement of Additional Information.
-5-
<PAGE> 10
The Fund is a non-diversified fund, which means that it may invest more of its
assets in fewer companies than if it were a diversified fund. By concentrating
more assets in a smaller number of investments, the Fund's risk is increased
because some investments have a greater effect on the Fund's performance. This
helps the Fund's performance when its investments are successful, but also hurts
the Fund's performance when its investments are unsuccessful.
PERFORMANCE
No performance information is provided because the Mid Cap Index Fund II will
not begin operations until on or about January 1, 2000.
FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY WHEN BUYING AND
HOLDING SHARES OF THE MID CAP INDEX FUND II.
<TABLE>
<CAPTION>
Shareholder Fees(1) Class A Shares Class B Shares Institutional
Class Shares
<S> <C> <C> <C>
(paid directly from your
investment)
Maximum Sales Charge (Load) 5.75%(2) None None
imposed upon purchases
(as a percentage of offering price)
Maximum Deferred Sales Charge None(3) 5.00%(4) None
(Load) imposed on redemptions
(as a percentage of original purchase
price or sale proceeds, as applicable)
Annual Fund Operating Expenses
(deducted from Fund assets)(5)
Management Fees(6). 0.01% 0.01% 0.01%
Distribution and/or Service
(12b-1) Fees(7) 0.25 1.00 None
Other Expenses(8) 1.11 0.96 0.86
------ ------ ----
Total Annual Fund
Operating Expenses(9) 1.42% 2.02% 0.92%
====== ====== ====
</TABLE>
(1) If you buy and sell shares through a broker or agent, they may also charge
you a transaction fee.
(2) As the amount of your investment increases, the sales charge imposed on the
purchase of Class A shares decreases. For more information, see "BUYING, SELLING
AND EXCHANGE FUND SHARES -- Buying Shares -- Class A sales charges."
(3) A contingent deferred sales charge (CDSC) of up to 1% may be imposed on
certain redemptions of Class A shares purchased without a sales charge.
-6-
<PAGE> 11
(4) A CDSC ranging from 5% to 1% is charged when you sell Class B shares within
the first six years of purchase. Class B shares are converted to Class A shares
after you have held them for seven years. See "Buying, Selling and Exchanging
Shares - Selling Shares - Contingent deferred sales charge (CDSC) on Class A and
Class B shares."
(5) Fees and expenses include the expenses of both the Fund and the Fund's pro
rata share of the expenses of the Series it invests in.
(6) Paid by the Series.
(7) Paid by the Fund.
(8) Because the Fund is new and does not yet have any operating history, "Other
Expenses" are based upon estimates for the current fiscal year. "Other Expenses"
include transfer agent, fund accounting and administration fees and expenses
paid by the Funds and fund accounting fees and expenses paid by the Series.
(9) At least through ______________, 2000, Villanova SA Capital Trust ("VSA")
has agreed to waive fees or otherwise reimburse expenses for the Fund so that
the Total Annual Operating Expenses will not exceed 0.__% for Class A shares,
____% for Class B shares and ____% for Institutional Class shares. This waiver
of fees and reimbursement of expenses is subject to a possible reimbursement of
VSA by the Fund within five years of the Fund's commencement of operations if
the reimbursement by the Fund can be implemented within the annual expense
limitations described above.
EXAMPLE
THIS EXAMPLE SHOWS WHAT YOU COULD PAY IN EXPENSES OVER TIME. YOU CAN ALSO USE
THIS EXAMPLE TO COMPARE THE COSTS OF THE FUND WITH OTHER MUTUAL FUNDS.
THE EXAMPLE ASSUMES THAT YOU INVEST $10,000 IN THE FUND FOR THE TIME PERIODS
INDICATED AND THEN SELL ALL OF YOUR SHARES AT THE END OF THOSE PERIODS. IT
ASSUMES A 5% RETURN EACH YEAR AND NO CHANGES IN EXPENSES. ALTHOUGH YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER, BASED ON THESE ASSUMPTIONS YOUR COSTS WOULD BE:
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
Class A Shares $655 $825
Class B Shares $685 $873
Institutional Class Shares $___ $___
</TABLE>
-7-
<PAGE> 12
You would pay the following expenses on the same investment if you did not sell
your shares:
1 Year 3 Years
------ -------
Class B Shares $185 $197
-8-
<PAGE> 13
THE NATIONWIDE INTERNATIONAL INDEX FUND
OBJECTIVE AND PRINCIPAL STRATEGIES
The Fund seeks to match the performance of the Morgan Stanley Capital
International Europe, Asia and Far East Capitalization Weighted Index (the "EAFE
Index") as closely as possible before the deduction of Fund expenses. The EAFE
Index is composed of equity securities of companies from various industrial
sectors whose primary trading markets are located outside the United States.
Companies included in the EAFE Index are selected from among the larger
capitalization companies in these markets. The weighting of the EAFE index is
based on the market capitalization of each of the countries in the index.
The International Index Fund invests in a statistically selected sample of
equity securities included in the EAFE Index and in derivative instruments
linked to the EAFE Index. The Fund may not invest in all of the countries, or
all of the companies within a country, represented in the EAFE Index, or in the
same weightings as in the EAFE Index. The Fund will choose investments so that
the market capitalizations, industry weightings and other fundamental
characteristics of the stocks and derivative instruments chosen are similar to
the EAFE Index as a whole. The Fund may also engage in securities lending.
PRINCIPAL RISKS
As with any mutual fund, the value of the Fund's investments -- and therefore
the value of the Fund's shares -- may go up or down. And because the value of
your investment in the Fund will fluctuate, there is the risk that you will lose
money. Individual stocks and other equity investments in the International Index
Fund - as well as a stock market as a whole -- could lose value. Individual
stocks can lose value if investors lose confidence in a company's ability to
grow or sustain profits. Investor confidence in stocks, economic developments in
the U. S. and in foreign countries, interest rate changes and other factors can
also affect the broader stock market. Typically, stocks are more volatile than
bonds.
Since the Fund invests principally in foreign securities, including securities
denominated in foreign currencies, the Fund's investments involve special risks,
including the possibility of substantial volatility due to adverse political,
economic or other developments. Foreign securities may also be less liquid and
harder to value than U.S. securities. In addition, the securities in which the
Fund invests are subject to significant changes in value due to exchange rate
fluctuations.
The Fund is also subject to selection risk, which is the risk that the Fund's
investments, which may not fully replicate the EAFE Index, may perform
differently from the securities in the EAFE Index. The Fund will attempt to be
fully invested at all times and will not hold a significant portion of its
assets in cash. The Fund will generally not attempt to hedge against adverse
market movements. Therefore, the Fund might go down in value more than other
mutual funds in the event of a general market decline. In addition, an index
fund has operating and other
-9-
<PAGE> 14
expenses while an index does not. As a result, while the Fund will attempt to
track the EAFE Index as closely as possible, it will tend to underperform the
index to some degree over time.
The Fund is a non-diversified fund, which means that it may invest more of its
assets in fewer companies than if it were a diversified fund. By concentrating
more assets in a smaller number of investments, the Fund's risk is increased
because some investments have a greater effect on the Fund's performance. This
helps the Fund's performance when its investments are successful, but also hurts
the Fund's performance when its investments are unsuccessful.
PERFORMANCE
No performance information is provided because the International Index Fund will
not begin operations until on or about January 1, 2000.
FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY WHEN BUYING AND
HOLDING SHARES OF THE INTERNATIONAL INDEX FUND.
Shareholder Fees(1) Class A Shares Class B Shares Institutional
-------------- -------------- -------------
Class Shares
------------
(paid directly from your
investment)
Maximum Sales Charge (Load) 5.75%(2) None None
imposed upon purchases
(as a percentage of offering price)
Maximum Deferred Sales Charge None(3) 5.00%(4) None
(Load) imposed on redemptions
(as a percentage of original purchase
price or sale proceeds, as applicable)
Annual Fund Operating Expenses
(deducted from Fund assets)(5)
Management Fees (6) 0.01% 0.01% 0.01%
Distribution and/or Service
(12b-1) Fees(7) 0.25 1.00 None
Other Expenses(8) 1.16 1.01 0.91
---- ---- ----
Total Annual Fund
Operating Expenses(9) 1.42% 2.02% 0.92%
==== ==== ====
(1) If you buy and sell shares through a broker or agent, they may also charge
you a transaction fee.
-10-
<PAGE> 15
(2) As the amount of your investment increases, the sales charge imposed on the
purchase of Class A shares decreases. For more information, see "BUYING, SELLING
AND EXCHANGE FUND SHARES -- Buying Shares -- Class A sales charges."
(3) A contingent deferred sales charge (CDSC) of up to 1% may be imposed on
certain redemptions of Class A shares purchased without a sales charge.
(4) A CDSC ranging from 5% to 1% is charged when you sell Class B shares within
the first six years of purchase. Class B shares are converted to Class A shares
after you have held them for seven years. See "Buying, Selling and Exchanging
Shares - Institutional
-11-
<PAGE> 16
Selling Shares - Contingent deferred sales charge (CDSC) on Class A and Class B
shares."
(5) Fees and expenses include the expenses of both the Fund and the Fund's pro
rata share of the expenses of the Series it invests in.
(6) Paid by the Series.
(7) Paid by the Fund.
(8) Because the Fund is new and does not yet have any operating history, "Other
Expenses" are based upon estimates for the current fiscal year. "Other Expenses"
include transfer agent, fund accounting and administration fees and expenses
paid by the Funds and fund accounting fees and expenses paid by the Series.
(9) At least through ______________, 2000, Villanova SA Capital Trust ("VSA")
has agreed to waive fees or otherwise reimburse expenses for the Fund so that
the Total Annual Operating Expenses will not exceed 0.86% for Class A shares,
1.61% for Class B shares and 0.61% for Institutional Class shares. This waiver
of fees and reimbursement of expenses is subject to a possible reimbursement of
VSA by the Fund within five years of the Fund's commencement of operations if
the reimbursement by the Fund can be implemented within the annual expense
limitations described above.
EXAMPLE
THIS EXAMPLE SHOWS WHAT YOU COULD PAY IN EXPENSES OVER TIME. YOU CAN ALSO USE
THIS EXAMPLE TO COMPARE THE COSTS OF THIS FUND WITH OTHER MUTUAL FUNDS.
THE EXAMPLE ASSUMES THAT YOU INVEST $10,000 IN THE FUND FOR THE TIME PERIODS
INDICATED AND THEN SELL ALL OF YOUR SHARES AT THE END OF THOSE PERIODS. IT
ASSUMES A 5% RETURN EACH YEAR AND NO CHANGES IN EXPENSES. ALTHOUGH YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER, BASED ON THESE ASSUMPTIONS YOUR COSTS WOULD BE:
1 Year 3 Years
------ -------
Class A Shares $660 $840
Class B Shares $705 $934
Institutional Class Shares $___ $___
You would pay the following expenses on the same investment if you did not sell
your shares:
1 Year 3 Years
------ -------
Class B Shares $205 $217
-12-
<PAGE> 17
NATIONWIDE BOND INDEX FUND
OBJECTIVE AND PRINCIPAL STRATEGIES
The Fund seeks to match the performance of the Lehman Brothers Aggregate Bond
Index (the "Aggregate Bond Index") as closely as possible before the deduction
of Fund expenses. The Aggregate Bond Index is composed primarily of
dollar-denominated investment grade bonds of different types.
The Bond Index Fund invests in a statistically selected sample of bonds that are
included in or correlated with the Aggregate Bond Index, and in derivative
instruments linked to the Aggregate Bond Index. The Fund may not invest in all
of the bonds in the Aggregate Bond Index, or in the same weightings as in the
Aggregate Bond Index. The Fund may invest in bonds not included in the index,
but which are selected to reflect characteristics such as maturity, duration, or
credit quality similar to bonds in the index. This may result in different
levels of interest rate, credit or prepayment risks from the levels of risks in
the Aggregate Bond Index. The Aggregate Bond Index is composed of a variety of
dollar-denominated investment grade bonds, including bonds issued by the U.S.
Government and foreign governments and their agencies, and bonds issued by the
U.S. or foreign companies, among others. The Fund may also engage in securities
lending.
Maturity is the time at which the principal amount of a bond is scheduled to be
repaid. [Inset Box]
Duration is the sensitivity of a bond or bond portfolio to changes in interest
rates. [Inset Box]
PRINCIPAL RISKS
As with any mutual fund, the value of the Fund's investments -- and therefore
the value of the Fund's shares -- may go up or down. And because the value of
your investment in the Fund will fluctuate, there is the risk that you will lose
money. The Fund's investments are subject to interest rate and credit risk.
Interest rate risk is the risk that when interest rates go up, the value of debt
instruments generally goes down. In general, the market price of debt securities
with longer maturities will go up or down more in response to changes in
interest rates than shorter term securities. Credit risk is the risk that the
issuer will be unable to pay the interest or principal when due. The degree of
credit risk depends on both the financial condition of the issuer and the terms
of the obligation.
The Bond Index Fund may invest in foreign securities to the extent foreign
securities are represented in the Aggregate Bond Index. Currently, the Aggregate
Bond Index includes a portion of foreign securities. The Fund will invest only
in dollar-denominated foreign securities. Because the Fund invests in foreign
securities, an investment in the Fund involves special risks, including the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities.
-13-
<PAGE> 18
The Fund is also subject to selection risk, which is the risk that the Fund's
investments, which may not fully replicate the Aggregate Bond Index, may perform
differently from the securities in the index. The Fund will attempt to be fully
invested at all times and will not hold a significant portion of its assets in
cash. The Fund will generally not attempt to hedge against adverse market
movements. Therefore, the Fund might go down in value more than other mutual
funds in the event of a general market decline. In addition, an index fund has
operating and other expenses while an index does not. As a result, while the
Fund will attempt to track Aggregate Bond Index as closely as possible, it will
tend to underperform the index to some degree over time.
The Fund is a non-diversified fund, which means that it may invest more of its
assets in fewer companies than if it were a diversified fund. By concentrating
more assets in a smaller number of investments, the Fund's risk is increased
because some investments have a greater effect on the Fund's performance. This
helps the Fund's performance when its investments are successful, but also hurts
the Fund's performance when its investments are unsuccessful.
PERFORMANCE
The following bar chart and table show two aspects of the Fund: volatility and
performance. The bar chart shows the volatility-or variability--of the Fund's
annual total returns over time and shows that fund performance can change from
year to year. The table shows the Fund's average annual total returns for
certain time periods compared to the returns of a broad-based securities index.
The bar chart and table provide some indication of the risks of investing in the
Fund. Remember, however, that past performance does not guarantee similar
results in the future.
Annual Returns - Nationwide Bond Index Fund
[add bar chart here]
Best Quarter: ___% ___ qtr of 19__ Worst Quarter: ___% ___qtr of 19__
Average annual returns - as of December 31, 1998(1)
<TABLE>
<CAPTION>
One Year Since Inception(2)
-------- ------------------
<S> <C> <C>
The Fund - Class A shares ____% ____%
The Fund - Class B shares ____% ____%
The Fund - Institutional Class shares ____% ____%
[INDEX](3) ____% ____%
</TABLE>
Such fees and expenses will be in addition to the fees and expenses borne by the
Series. Therefore, had the Fund been invested in the Series for the time periods
indicated, its performance would have been less because of the additional fees
and expenses incurred at the Fund level.
(1) These returns reflect performance after sales charges (for Class A and
Class B shares) and expenses are deducted, and include the performance of
the Series prior to commencement on December __, 1999.
(2) The Series began operation on ________, 199_. These returns include
performance based on the Series, which was achieved prior to the creation
of the Fund (12/__/99). The returns have been restated for sales charges
but not for fees applicable to each class of the Fund. Had the Fund been
in existence for the time periods presented, the performance of each class
of the Fund would have been lower as a result of their additional
expenses.
(3) The ___________ is an unmanaged index ________________. These returns do
not include the effect of any sales charges or expenses. If sales charges
and expenses were deducted, the actual return of this Index would be
lower.
FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY WHEN BUYING AND
HOLDING SHARES OF THE BOND INDEX FUND.
Shareholder Fees(1) Class A Shares Class B Shares Institutional
- ------------------- -------------- -------------- -------------
Class Shares
------------
(paid directly from your
investment)
Maximum Sales Charge (Load) 5.75%(2) None None
imposed upon purchases
(as a percentage of offering price)
Maximum Deferred Sales Charge None(3) 5.00%(4) None
(Load) imposed on redemptions
(as a percentage of original purchase
price or sale proceeds, as applicable)
Annual Fund Operating Expenses
(deducted from Fund assets)(5)
Management Fees(6) 0.06(%) 0.06% 0.06%
Distribution and/or Service
(12b-1) Fees(7) 0.25 1.00 None
Other Expenses(8) 1.11 0.96 0.86
---- ---- ----
-14-
<PAGE> 19
Total Annual Fund
Operating Expenses(9) 1.42(%) 2.02% 0.92%
==== ==== ====
(1) If you buy and sell shares through a broker or agent, they may also charge
you a transaction fee.
(2) As the amount of your investment increases, the sales charge imposed on the
purchase of Class A shares decreases. For more information, see "BUYING, SELLING
AND EXCHANGE FUND SHARES -- Buying Shares -- Class A sales charges."
(3) A contingent deferred sales charge (CDSC) of up to 1% may be imposed on
certain redemptions of Class A shares purchased without a sales charge.
(4) A CDSC ranging from 5% to 1% is charged when you sell Class B shares within
the first six years of purchase. Class B shares are converted to Class A shares
after you have held them for seven years. See "Buying, Selling and Exchanging
Shares - Selling Shares - Contingent deferred sales charge (CDSC) on Class A and
Class B shares."
(5) Fees and expenses include the expenses of both the Fund and the Fund's pro
rata share of the expenses of the Series it invests in.
(6) Paid by the Series. The investment adviser of the Series has entered into
contractual arrangements to provide that the management fee for the Series, when
combined with administrative fees of certain funds that invest in the Series,
will not exceed specific amounts. As a result of these contractual arrangements,
the investment adviser of the Series currently receives a management fee of
0.01%.
(7) Paid by the Fund.
(8) Because the Fund is new and does not yet have any operating history, "Other
Expenses" are based upon estimates for the current fiscal year. "Other Expenses"
include transfer agent, fund accounting and administration fees and expenses
paid by the Funds and fund accounting fees and expenses paid by the Series.
(9) At least through ______________, 2000, Villanova SA Capital Trust ("VSA")
has agreed to waive fees or otherwise reimburse expenses for the Fund so that
the Total Annual Operating Expenses will not exceed 0.81% for Class A shares,
1.56% for Class B shares and 0.56% for Institutional Class shares. This waiver
of fees and reimbursement of expenses is subject to a possible reimbursement of
VSA by the Fund within five years of the Fund's commencement of operations if
the reimbursement by the Fund can be implemented within the annual expense
limitations described above.
EXAMPLE
THIS EXAMPLE SHOWS WHAT YOU COULD PAY IN EXPENSES OVER TIME. YOU CAN ALSO USE
THIS EXAMPLE TO COMPARE THE COSTS OF THIS FUND WITH OTHER MUTUAL FUNDS.
THE EXAMPLE ASSUMES THAT YOU INVEST $10,000 IN THE FUND FOR THE TIME PERIODS
INDICATED AND THEN SELL ALL OF YOUR SHARES AT THE END OF THOSE PERIODS. IT
ASSUMES A 5% RETURN EACH YEAR AND NO CHANGES IN EXPENSES. ALTHOUGH YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER, BASED ON THESE ASSUMPTIONS YOUR COSTS WOULD BE:
-15-
<PAGE> 20
1 Year 3 Years
------ -------
Class A Shares $655 $825
Class B Shares $685 $873
Institutional Class Shares $114 $356
You would pay the following expenses on the same investment if you did not sell
your shares:
1 Year 3 Years
------ -------
Class B Shares $185 $197
-16-
<PAGE> 21
MORE ABOUT THE FUNDS
ALL FUNDS
The Funds will not attempt to buy or sell securities based on Fund management's
economic, financial or market analysis, but will instead employ a "passive"
investment approach. This means that Fund management will attempt to invest in a
portfolio of assets whose performance is expected to match approximately the
performance of the respective index before deduction of Fund expenses. A Fund
will only buy or sell securities when Fund management believes it is necessary
to do so in order to match the performance of the respective index. Accordingly,
it is anticipated that a Fund's portfolio turnover and trading costs will be
lower than "actively" managed funds. However, the Funds have costs operating and
other expenses, while an index does not. Therefore, each Fund will tend to
underperform its target index to some degree over time.
Each Fund will be substantially invested in securities in the applicable index,
and will invest at least 80% of its assets in securities or other financial
instruments which are contained in or correlated with securities in the
applicable index. A Fund may change its target index if Fund management believes
a different index would better enable the Fund to match the performance of the
market segment represented by the current index and, accordingly, the investment
objective of a Fund may be changed without shareholder approval. In addition to
the investment strategies described below, each Fund may also invest in illiquid
securities and repurchase agreements, and may engage in securities lending.
Each Fund will also invest in short term money market instruments as cash
reserves to maintain liquidity. These instruments may include obligations of the
U.S. Government, its agencies or instrumentalities, highly rated bonds or
comparable unrated bonds, commercial paper, bank obligations and repurchase
agreements. To the extent a Fund invests in short term money market instruments,
it will generally also invest in options, futures or other derivatives in order
to maintain full exposure to the index. The Funds will not invest in options,
futures, other derivative instruments or short term money market instruments in
order to lessen the Funds' exposure to common stocks or bonds, as the case may
be, as a defensive strategy, but will instead attempt to remain fully invested
at all times.
THE SMALL CAP INDEX FUND
The Russell 2000 is composed of the common stocks of the 1001st through the
3000th largest U.S. companies by market capitalization, as determined by the
Frank Russell Company. The stocks represented in the index are issued by
small-capitalization (generally less than $1.5 billion) U.S. companies in a wide
range of businesses. The Russell 2000 is a market-weighted index, which means
that the largest stocks represented in the index have the most effect on the
index's performance. The Russell 2000 is generally considered broadly
representative of the performance of publicly traded U.S. smaller-capitalization
stocks. Frank Russell Company's selection of a stock for the Russell 2000 does
not mean that Frank Russell Company believes the stock to be an attractive
investment.
-17-
<PAGE> 22
The Frank Russell Company updates the Russell 2000 once each year, at which time
there may be substantial changes in the composition of the index (and
consequently, significant turnover in the Fund). Stocks of companies that merge,
are acquired or otherwise cease to exist during the year are not replaced in the
index.
The Fund may not invest in all of the common stocks in the Russell 2000, or in
the same weightings as in the Russell 2000. Instead, the Fund may invest in a
statistically selected sample of the stocks included in the Russell 2000. The
Fund will choose investments so that the market capitalizations, industry
weightings and other fundamental characteristics of the stocks and derivative
instruments in its portfolio are similar to the Russell 2000 as a whole.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts linked to the
performance of the Russell 2000. Derivatives allow the Fund to increase or
decrease its exposure to the Russell 2000 quickly and at less cost than buying
or selling stocks. The Fund will invest in options and futures and other
derivative instruments in order to gain market exposure quickly in the event of
subscriptions to purchase shares of the Fund, to maintain liquidity in the event
of redemptions and to keep trading costs low. In connection with the use of
derivative instruments, the Fund may enter into short sales in order to adjust
the weightings of particular securities represented in a derivative to more
accurately reflect the securities' weightings in the target index.
THE MID CAP INDEX FUND II
The S&P 400 is composed of 400 common stocks issued by U.S. mid-capitalization
companies in a wide range of businesses. The S&P 400 is generally considered
broadly representative of the performance of publicly traded U.S.
mid-capitalization stocks. The S&P 400 is a market-weighted index, which means
that the largest stocks represented in the index have the most effect on the
index's performance. The stocks in the S&P 400 are chosen by Standard & Poor's
Ratings Group ("S&P"). S&P chooses stocks for inclusion in the S&P 400 based on
market capitalization, trading activity and the overall mix of industries
represented in the index, among other factors.
The Fund may invest in all 400 stocks in the S&P 400 in roughly the same
proportion as their weightings in the S&P 400. For example, if 2% of the S&P 400
is made up of the stock of a particular company, the Fund may invest
approximately 2% of its assets in that company. This strategy is known as "full
replication." However, when the investment manager of the series believes it
would be cost efficient the Fund may deviate from full replication and instead
invest in a sample of 400 stocks in the S&P 400 based on the investment
manager's optimization process, a statistical sampling technique that aims to
create a portfolio which has aggregate investment characteristics, such as
average market capitalization and industry weightings, similar to the S&P 400 as
a whole, but which involves fewer transactions costs than would be incurred
through full replication. The Fund may also purchase stocks not included in the
S&P 400 when its investment manager believes that it would be a cost efficient
way of approximating the S&P 400's performance to do so. If the Fund uses these
techniques, it may not track the S&P 400 as closely as it would if it were fully
replicating the S&P 400.
-18-
<PAGE> 23
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts linked to the
performance of the S&P 400. Derivatives allow the Fund to increase or decrease
its exposure to the S&P 400 quickly and at less cost than buying or selling
stocks. The Fund will invest in options and futures and other derivative
instruments in order to gain market exposure quickly in the event of
subscriptions to purchase shares of the Fund, to maintain liquidity in the event
of redemptions and to keep trading costs low. In connection with the use of
derivative instruments, the Fund may enter into short sales in order to adjust
the weightings of particular securities represented in a derivative to more
accurately reflect the securities' weightings in the target index.
THE INTERNATIONAL INDEX FUND
The EAFE Index is composed of equity securities of companies from various
industrial sectors whose primary trading markets are located outside the United
States. Companies included in the EAFE Index are selected from among the larger
capitalization companies in these markets. The countries currently included in
the EAFE Index are Australia, Austria, Belgium, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, The Netherlands, New
Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and United
Kingdom. The weighting of the EAFE Index among these countries is based upon
each country's relative market capitalizations. The stocks in the EAFE Index are
chosen by Morgan Stanley Capital International Limited ("Morgan Stanley").
Morgan Stanley chooses stocks for inclusion in the EAFE Index based on market
capitalization, trading activity and the overall mix of industries represented
in the index, among other factors. The EAFE Index is generally considered
broadly representative of the performance of stocks traded in the international
markets. Morgan Stanley's selection of a stock for the EAFE Index does not mean
that Morgan Stanley believes the stock to be an attractive investment.
The Fund may not invest in all of the countries, or all of the companies within
a country, represented in the EAFE Index, or in the same weightings as the EAFE
Index. Instead, the International Index Fund may invest in a statistically
selected sample of equity securities included in the EAFE Index and in
derivative instruments correlated with countries within the EAFE Index.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts correlated
with countries within the EAFE Index. Derivatives allow the Fund to increase or
decrease its exposure to the EAFE Index quickly and at less cost than buying or
selling stocks. The Fund will invest in options and futures and other derivative
instruments in order to gain market exposure quickly in the event of
subscriptions for shares of the Fund, to maintain liquidity in the event of
redemptions and to keep trading costs low. In connection with the use of
derivative instruments, the Fund may enter into short sales in order to adjust
the weightings of particular securities represented in a derivative to more
accurately reflect the securities' weightings in the target index.
-19-
<PAGE> 24
THE BOND INDEX FUND
The Aggregate Bond Index is a market-weighted index comprised of 6,500
dollar-denominated investment grade bonds with maturities greater than one year.
The Aggregate Bond Index includes:
- - U.S. government and government agency securities
- - Securities issued by supranational entities, such as the World Bank
- - Securities issued by foreign governments and U.S. and foreign corporations
- - Mortgage backed securities
Mortgage backed securities are securities that give their holder the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans. [Inset Box]
Lehman Brothers' selection of a bond for the Aggregate Bond Index does not mean
that Lehman Brothers believes the security to be an attractive investment.
The Fund may not invest in all of the bonds in the Aggregate Bond Index, or in
the same weightings as in the Aggregate Bond Index. Instead, the Fund may invest
in a statistically selected sample of bonds included in the Aggregate Bond
Index, or in a statistically selected sample of bonds not included in the index
but correlated with bonds that are in the index, and in derivative instruments
linked to the Aggregate Bond Index. The Fund may invest in bonds not included in
the index, but which are selected to reflect characteristics such as maturity,
duration, or credit quality similar to bonds in the index. This may result in
different levels of interest rate, credit or other risks from the levels of
risks on the securities included in the Aggregate Bond Index. The Bond Index
Fund may trade securities to the extent necessary to maintain the duration of
certain segments of the portfolio close to the duration of corresponding
segments of the index, and, accordingly, the Bond Index Fund may have a higher
portfolio turnover rate than the other Funds.
Because the Aggregate Bond Index is composed of investment grade bonds, the Fund
will invest in corporate bonds rated investment grade (rated at least Baa3 by
Moody's Investors Services, Inc. or BBB by Standard & Poor's Ratings Group), or
if unrated, of comparable quality. The Fund may continue to hold a security that
is downgraded below investment grade.
The Fund will usually invest a substantial portion of its assets in mortgage
backed securities. Mortgage backed securities may be either pass through
securities or collateralized mortgage obligations.
Pass through securities represent a right to receive principal and interest
payments collected on a pool of mortgages, which are passed through to security
holders (less servicing costs). [Inset Box]
-20-
<PAGE> 25
Collateralized Mortgage Obligations are mortgage backed securities that divide
the principal and interest payments collected on a pool of mortgages into
several revenue streams with different priority rights to various portions of
the underlying mortgage payments. [Inset Box]
The Fund may also purchase securities on a when-issued basis, and it may
purchase or sell securities for delayed delivery. This is when the Fund buys or
sells securities with payment and delivery taking place in the future so that
the Fund can lock in a favorable yield and price at the time of entering into
the transaction. The Fund may also enter into dollar rolls in which the Fund
sells securities for delivery in the current month and simultaneously contracts
to repurchase substantially similar securities on a future date from the same
party. During the period between the Fund's sale of one security and purchase of
a similar security, the Fund does not receive principal and interest on the
securities sold. The Fund may also enter into standby commitment agreements in
which the Fund is committed, for a stated period of time, to buy a stated amount
of a fixed income security which may be issued and sold to the Fund at the
option of the issuer. The price of the security is fixed at the time of the
commitment, and the Fund is paid a commitment fee whether the security is issued
or not.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts correlated
with the performance of the Aggregate Bond Index. Derivatives may allow the Fund
to increase or decrease its exposure to the Aggregate Bond Index quickly and at
less cost than buying or selling bonds. The Fund may invest in options and
futures and other derivative instruments in order to gain market exposure
quickly in the event of subscriptions to purchase shares of the Fund, to
maintain liquidity in the event of redemptions and to keep trading costs low. In
connection with the use of derivative instruments, the Fund may enter into short
sales in order to adjust the weightings of particular securities represented in
a derivative to more accurately reflect the securities' weightings in the target
index.
INVESTMENT RISKS
This section contains a summary discussion of the general risks of investing in
a Fund. As with any mutual fund, there can be no guarantee that a Fund will meet
its goals or that a Fund's performance will be positive for any period of time.
SMALL CAP INDEX FUND, MID CAP INDEX FUND II AND INTERNATIONAL INDEX FUND
STOCK MARKET RISK - Stock market risk is the risk that the stock markets will go
down in value, including the possibility that the markets will go down sharply
and unpredictably. The stock market is affected by numerous factors, including
interest rates, the outlook for corporate profits, the health of the U.S. and
global economies, national and world social and political events, and the
fluctuations of other stock markets around the world. There is also the risk
that large capitalization companies could fall out of favor and investors may
look to other types of investments.
-21-
<PAGE> 26
BOND INDEX FUND
INTEREST RATE RISK - Interest rate risk is the risk that increases in market
interest rates may decrease the value of the bonds in the Fund's portfolio.
Usually the prices of bonds fall when interest rates increase, and rise when
interest rates decrease. Typically, the longer the maturity of a bond, the more
sensitive it is to price shifts as a result of interest rate changes. Likewise,
the longer the Fund holds a bond, the greater the chance that interest rate
changes will affect the bond's value.
INFLATION RISK - Inflation risk affects the value of fixed-rate investments such
as bonds. If the Fund buys bonds when inflation and interest rates are low, the
value of these bonds could fall as inflation rises and interest rates increase.
This could happen as investors find the bonds with lower interest rates less
attractive than bonds that pay higher interest rates.
CREDIT RISK - Credit risk is the risk that the issuer will be unable to pay the
interest or principal when due. The degree of credit risk depends on both the
financial condition of the issuer and the terms of the obligation.
EVENT RISK - Event risk is the risk that corporate issuers may undergo
restructurings, such as mergers, leveraged buyouts, takeovers, or similar
events, which may be financed by increased debt. As a result of the added debt,
the credit quality and market value of a company's bonds may decline
significantly.
MORTGAGE BACKED SECURITIES - When interest rates fall, borrowers may refinance
or otherwise repay principal on their mortgages earlier than scheduled. When
this happens, certain types of mortgage backed securities will be paid off more
quickly than originally anticipated and owners of these securities have to
invest the proceeds in securities with lower yields. This risk is known as
"prepayment risk." When interest rates rise, however, fewer borrowers refinance
and certain types of mortgage backed securities are paid off more slowly than
originally anticipated, which causes the value of these securities to fall. This
risk is known as "extension risk." Because of prepayment risk and extension
risk, small movements in interest rates (both increases and decreases) may
significantly reduce the value of certain mortgage backed securities.
DOLLAR ROLLS - Dollar Rolls involve the risk that the market value of the
securities that the Fund is committed to buy may decline below the price of the
securities the Fund has sold. These transactions may involve leverage. The Fund
will engage in dollar rolls to enhance return and not for the purpose of
borrowing.
STANDBY COMMITMENT AGREEMENTS - Standby commitment agreements involve the risk
that the value of the security on the delivery date may be less than its
purchase price.
WHEN ISSUED SECURITIES, DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS -
When issued and delayed delivery securities and forward commitments involve the
risk that the security the Fund buys will lose value prior to its delivery.
There also is the risk that the security will not be issued or that the other
party will not meet its obligation. If this occurs the Fund loses
-22-
<PAGE> 27
both the investment opportunity for the assets it has set aside to pay for the
security and any gain in the security's price.
FOREIGN GOVERNMENT DEBT - The Bond Index Fund may invest in debt securities
issued or guaranteed by foreign governments or their agencies. Investments in
these securities subject the Fund to the risk that a government entity may delay
or refuse to pay interest or repayment of principal on its debt for various
reasons, including cash flow problems, insufficient foreign currency reserves,
political considerations, the relative size of its debt position to its economy
or its failure to put in place economic reforms required by the International
Monetary Fund or other multilateral agencies. If a government entity defaults,
it may ask for more time in which to pay or for further loans. There is no
bankruptcy proceeding by which all or part of debt securities that a government
entity has not repaid may be collected.
INTERNATIONAL INDEX FUND AND BOND INDEX FUND
FOREIGN MARKET RISK - Foreign security investment involves special risks not
present in U.S. investments that can increase the chances that a Fund will lose
money. In particular, a Fund is subject to the risk that because there are
generally fewer investors in foreign markets and a smaller number of securities
traded each day, it may make it difficult for a Fund to buy and sell certain
securities. In addition, prices of foreign securities may go up and down more
than prices of securities traded in the U.S.
FOREIGN ECONOMY RISK - The economies of certain foreign markets often do not
compare favorably with that of the U.S. with respect to such issues as growth of
gross national product, reinvestment of capital, resources, and balance of
payments position. Certain such economies may rely heavily on particular
industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair a Fund's ability to
purchase or sell foreign securities or transfer a Fund's assets or income back
into the U.S., or otherwise adversely affect a Fund's operations. Other foreign
market risks include foreign exchange controls, difficulties in pricing
securities, defaults on foreign government securities, difficulties in enforcing
favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the U.S. or other
foreign countries.
GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING STANDARDS - Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the U.S. does. Other countries may not have laws to protect
investors the way that the U.S.' securities laws do. For example, some foreign
countries may have no laws or rules against insider trading (this is when a
person buys or sells a company's securities based on "inside" non-
-23-
<PAGE> 28
public information about that company). Accounting standards in other countries
are not necessarily the same as in the U.S. If the accounting standards in
another country do not require as much detail as U.S. accounting standards, it
may be harder for a Fund's portfolio manager to completely and accurately
determine a company's financial condition. Also, brokerage commissions and other
costs of buying and selling securities often are higher in foreign countries
than they are in the United States. This reduces the amount the fund can earn on
its investments.
INTERNATIONAL INDEX FUND
CURRENCY RISK AND EXCHANGE RISK - Securities in which the International Index
Fund invests are usually denominated or quoted in currencies other than the U.S.
dollar. Changes in foreign currency exchange rates will affect the value of the
securities of the Fund. Generally, when the U.S. dollar rises in value against a
foreign currency, your investment in a security denominated in that currency
loses value because the currency is worth fewer U.S. dollars. Conversely, when
the U.S. dollar decreases in value against a foreign currency, your investment
in a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk is generally known as "currency risk" which
is the possibility that a stronger U.S. dollar will reduce returns for U.S.
investors investing overseas and a weak U.S. dollar will increase returns for
U.S. investors investing overseas.
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE U.S. - The International Index
Fund generally holds the foreign securities and cash in which it invests outside
the U.S. in foreign banks and securities depositories. Certain of such foreign
banks and securities depositories may be recently organized or new to the
foreign custody business and/or may have operations subject to limited or no
regulatory oversight. Also, the laws of certain countries may put limits on the
Fund's ability to recover its assets if a foreign bank or depository or issuer
of a security or any of their agents goes bankrupt. In addition, it can be
expected that it will be more expensive for the Fund to buy, sell, and hold
securities in certain foreign markets than in the U.S. market due to higher
brokerage, transaction, custody and/or other costs. The increased expense to
invest in foreign markets reduces the amount the Fund can earn on its
investments and typically results in a higher operating expense ratio for the
Fund than investment companies invested only in the U.S.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the U.S. Foreign settlement procedures and trade
regulations also may involve certain risks (such as delays in payment for or
delivery of securities) not typically generated by the settlement of U.S.
investments. Communications between the U.S. and emerging market countries may
be unreliable, increasing the risk of delayed settlements or losses of security
certificates. Settlements in certain foreign countries at times have not kept
pace with the number of securities transactions; these problems may make it
difficult for the Fund to carry out transactions. If the Fund cannot settle or
is delayed in settling a purchase of securities, it may miss attractive
investment opportunities and certain of its assets may be uninvested with no
return earned thereon for some period. If a Fund cannot settle or is delayed in
settling a sale of securities, it may lose money if the value of the security
then declines or, if it has contracted to sell the security to another party,
the Fund could be liable to that party for any losses incurred.
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<PAGE> 29
Dividends or interest on, or proceeds from the sale of, foreign securities may
be subject to foreign withholding taxes, and special U.S. tax considerations may
apply.
EUROPEAN ECONOMIC AND MONETARY UNION ("EMU") - A number of European countries
have entered into EMU in an effort to reduce trade barriers between themselves
and eliminate fluctuations in their currencies. EMU has established a single
European currency (the euro), which was introduced in January 1, 1999 and is
expected to replace the existing national currencies of all initial EMU
participants by July 1, 2002. Certain securities (beginning with government and
corporate bonds) were redenominated in the euro. These securities trade and make
dividend and other payments only in euros. Like other investment companies and
business organizations, including the companies in which the Funds invest, the
Funds could be adversely affected:
- - If the transition to euro, or EMU as a whole, does not proceed as planned.
- - If a participating country withdraws from EMU.
- - If the computing, accounting and trading systems used by a Fund's
service providers, or by other entities with which the Fund or its
service providers do business, are not capable of recognizing the
euro as a distinct currency.
SMALL CAP INDEX FUND AND MID CAP INDEX FUND II
SMALL AND MID CAP - Small cap companies and some mid cap companies may have
limited product lines or markets. They may be less financially secure than
larger, more established companies. They may depend on a small number key
personnel. If a product fails, or if management changes, or there are other
adverse developments, the Fund's investment in a small cap company may lose
substantial value.
Smaller cap securities generally trade in lower volumes and are subject to
greater and more unpredictable price changes than larger cap securities or the
stock market as a whole. Investing in small and mid cap securities requires a
long-term view.
ALL FUNDS
SELECTION RISK - Selection risk is the risk that a Fund's investments, which may
not fully replicate the index, may perform differently from the securities in
the index.
DERIVATIVES - Derivatives allow a Fund to increase or decrease its risk exposure
more quickly and efficiently than other types of instruments. Each Fund may use
the following types of derivative instruments including: futures, forwards and
options, options on futures, swaps and indexed securities.
Futures are exchange-traded contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets (or a money payment based on
the change in value of certain assets or an index) at a specified time. [Inset
Box]
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Forwards are private contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets (or a money payment based on
the change in value of certain assets or an index) at a specified time. [Inset
Box]
Options are exchange-traded or private contracts involving the right of a holder
to deliver (a "put") or receive (a "call") certain assets (or a money payment
based on the change in value of certain assets or an index) from another party
at a specified price with a specified time period. [Inset Box]
Swaps are private contracts involving the obligation of each party to exchange
specified payments, which may be based on the value of an index or asset, with
the other party at specified times. [Inset Box]
Indexed Securities are debt obligations that return a variable amount of
principal or interest based on the value of an index at a specified time. [Inset
Box]
Derivatives are volatile and involve significant risks, which may include:
LEVERAGE RISK - the risk associated with certain types of investments
or trading strategies (such as borrowing money to increase the amount
of investments) that relatively small market movements may result in
large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that
greatly exceed the amount originally invested.
CREDIT RISK - the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable to
honor its financial obligation to a Fund.
CURRENCY RISK - the risk that changes in the exchange rate between
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
LIQUIDITY RISK - the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the
price that the seller believes the security is currently worth.
The Funds may use derivatives for anticipatory hedging. Anticipatory hedging is
a strategy in which a Fund uses a derivative to offset the risk that securities
in which the Fund intends to invest will increase in value before the Fund has
an opportunity to purchase the securities. The Funds will use derivatives for
anticipatory hedging in order to gain exposure efficiently to their underlying
indexes in the event the Funds receive cash inflows.
BORROWING AND LEVERAGE - The Funds may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net asset
value of Fund shares and in the yield on a Fund's portfolio. Borrowing will cost
a Fund interest expense and other fees. The cost of borrowing may reduce a
Fund's return.
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<PAGE> 31
Certain securities that a Fund buys may create leverage, including, for example,
when issued securities, forwards commitments and options.
ILLIQUID SECURITIES - Each Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If a Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
RESTRICTED SECURITIES - Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that a
Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.
Restricted securities may be illiquid. A Fund may be unable to sell them on a
short notice or may be able to sell them only at a price below current value. A
Fund may get only limited information about the issuer, so may be less able to
predict a loss. In addition, if Fund management receives material adverse non
public information about the issuer, a Fund will not be able to sell the
security.
RULE 144A SECURITIES - Rule 144A securities are restricted securities that can
be resold to qualified Institutional buyers but not to the general public. Rule
144A securities may have an active trading market but carry the risk that the
active trading market may not continue.
SECURITIES LENDING - Each Fund may lend securities to financial institutions
that provide cash or government securities as collateral. Securities lending
involves the risk that the borrower may fail to return the securities in a
timely manner or at all. As a result, a Fund may lose money and there may be a
delay in recovering the loaned securities. A Fund could also lose money if it
does not recover the securities and the value of the collateral falls. These
events could trigger adverse tax consequences to a Fund.
SHORT SALES - A Fund may borrow the security sold short to make delivery to the
buyer. The Fund must then replace the security it has borrowed. If the price of
a security sold short goes up between the time of the short sale and the time
the Fund must deliver the security to the lender, the Fund will incur a loss.
The Fund must also pay the lender any interest accrued during the period of the
loan.
MANAGEMENT
INVESTMENT MANAGER
Fund Asset Management, L.P., P.O. Box 9011, Princeton, New Jersey 08543-9011,
manages the underlying Series' investments and their business operations under
the overall supervision of the Board of Trustees of Quantitative Master Series
Trust. Fund Asset Management has the responsibility for making all investment
decisions for the Series.
The table below shows the fees payable to Fund Asset Management by each Series:
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<PAGE> 32
Series Fee Rate
------ --------
(as a percentage of the Series
average net assets)
Master Small Cap Series .08%
Master Mid Cap Series 0.01%
Master International (Capitalization
Weighted) Series .01%
Master Aggregate Bond Series .06%
Fund Asset Management has entered into contractual arrangements to provide that
the management fee for each Series, when combined with administrative fees of
certain funds that invest in such Series, will not exceed specified amounts. As
a result of these contractual arrangements, Fund Asset Management currently
receives a management fee of 0.01% from the Master Small Cap Series and the
Master Aggregate Bond Series.
Fund Asset Management is a wholly-owned indirect subsidiary of Merrill Lynch &
Co., Inc. and is part of the Merrill Lynch Asset Management Group, which had
approximately $520 billion in investment company and other portfolio assets
under management as of August 1999. This amount includes assets managed for
Merrill Lynch affiliates.
The Funds do not have an investment adviser since each Fund's assets are
invested in its corresponding Series. The Funds have hired VSA, Three Nationwide
Plaza, Columbus, Ohio 43215, to provide administration services and to monitor
the underlying Series.
The table below shows the fees payable to VSA by each Fund.
Series Assets Fee Rate*
------ ------ ---------
Small Cap Index Fund $0 up to $250 million 0.27%
$250 million and more 0.24%
Mid Cap Index Fund II $0 up to $250 million 0.29%
$250 million and more 0.26%
International Index Fund $0 up to $250 million 0.34%
$250 million and more 0.31%
Bond Index Fund $0 up to $250 million 0.29%
$250 million and more 0.26%
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<PAGE> 33
*Subject to a $_____ minimum annual fee per Fund.
VSA has retained Fund Asset Management to provide certain sub-administration
Institutional s to each Fund, and will compensate Fund Asset Management for
providing such services from the fees paid to VSA by each Fund.
MASTER/FEEDER STRUCTURE
Unlike many other mutual funds, which directly buy and manage their own
portfolio securities, the Funds seek to achieve their investment objectives by
investing all their assets in the corresponding Series of the Quantitative
Master Series Trust. Investors in each Fund will acquire an indirect interest in
the underlying Series.
Other "feeder" funds may also invest in the "master" Series. This structure may
enable the Funds to reduce costs through economies of scale. A larger investment
portfolio may also reduce certain transaction costs to the extent that
contributions to and redemptions from the master from different feeders may
offset each other and produce a lower net cash flow.
A Fund may withdraw from the Series at any time and may invest all of its assets
in another pooled investment vehicle or retain an investment adviser to manage
the Fund's assets directly.
Smaller feeder funds may be harmed by the actions of larger feeder funds. For
example, a larger feeder fund could have more voting power than a Fund over the
operations of the Series.
Whenever the Series holds a vote of its feeder funds, a Fund will pass the vote
through to its own shareholders.
BUYING, SELLING AND EXCHANGING FUND SHARES
In this section, "we" and "our" refer to Nationwide Advisory Services,
Inc. ("NAS"), as distributor of the Funds' shares. "You" and "your" mean
potential investors and current shareholders.
CHOOSING A SHARE CLASS
As noted in the Fund Summaries, we offer three different share classes to give
investors different price and cost options. Class A and Class B shares of the
Funds are available to all investors; Institutional Class shares are available
to a limited group of investors, such as certain funds of funds offered by NAS.
With Class A shares, you pay a sales charge (known as a front-end sales charge)
when you purchase the shares. With Class B shares, you pay a sales charge (known
as a contingent deferred sales charge or CDSC) if you sell your shares within
six years after purchase. There is no such charge on Institutional Class shares.
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<PAGE> 34
Class A and Class B Class shares pay distribution and/or service fees under a
Distribution Plan. These fees are retained by NAS or are paid by NAS to brokers
for distribution and shareholder services. Class A and Class B shares also pay
an administrative service fee. These fees are paid to brokers and other entities
who provide administrative support services to the beneficial owners of the
shares.
If you want lower annual fund expenses, Class A shares may be right for you,
particularly if you qualify for a reduction or waiver of sales charges. If you
do not want to pay an up-front sales charge, and you anticipate holding your
shares for the long term, Class B shares may be more appropriate. NAS reserves
the right to reject an order in excess of $100,000 for Class B shares and an
order for Class B shares for Individual Retirement Accounts ("IRA accounts") for
shareholders 70 1/2 years old and older. When choosing a share class, consider
the following:
<TABLE>
<CAPTION>
Class A shares Class B shares
- --------------------------------------------------------------------------------------------------------
<S> <C>
Front-end sales charge means that a portion No front-end sales charge, so your full
of your initial investment goes toward the sales investment immediately goes toward
charge, and is not invested buying shares
- --------------------------------------------------------------------------------------------------------
Reductions and waivers of the sales charges No reductions of the contingent deferred
available sales charge available, but waivers
available
- --------------------------------------------------------------------------------------------------------
Lower expenses than Class B shares means Higher distribution fees than Class A
higher dividends per share shares mean lower dividends per share
- --------------------------------------------------------------------------------------------------------
Conversion features are not applicable After seven years, Class B shares convert
into Class A shares, which reduces your
future fund expenses
- --------------------------------------------------------------------------------------------------------
No sales charges when shares are sold Contingent deferred sales charges (CDSC)
back to the Fund* if shares sold within six years: 5% in the
first year, 4% in the second, 3% in the
third and fourth years, 2% in the fifth, and
1% in the sixth year
</TABLE>
- ----------
*A CDSC of up to 1% may be charged on certain redemptions of Class A shares
purchased without a sales charge.
For investors who are eligible to purchase Service Class shares, the
purchase of Institutional Class shares will be preferable to purchasing Class A
or Class B Shares.
BUYING SHARES
MINIMUM INVESTMENTS - CLASS A AND CLASS B SHARES
To open an account (per Fund) $1000
Through the Automatic Asset $ 25
Accumulation plan
per transaction
Additional investments $ 100
(per Fund)
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<PAGE> 35
If you purchase Class A or Class B shares through an account at a broker (other
than NAS), different minimum account requirements may apply. These minimum
investment requirements for Class A shares do not apply to certain retirement
plans. Call 1-800-848-0920 for more information.
PURCHASE PRICE
The purchase or "offering" price of one share of a Fund is its "net asset value"
or NAV, plus any applicable sales charge. A separate NAV is calculated for each
class of a Fund. The NAV for a class is determined by dividing the total market
value of the securities owned by a Fund, less liabilities, allocable to a class
by the total number of that class' outstanding shares. NAV is determined at the
earlier of the close of regular trading on the New York Stock Exchange or 4:15
p.m. Eastern Time on each day the Exchange is open for trading.
To the extent that a Fund's investments are traded in markets that are open when
the New York Stock Exchange is closed, the value of the Fund's investments may
change on days when shares cannot be purchased or redeemed.
The Funds do not calculate NAV on the following days:
- - Christmas Day
- - New Year's Day
- - Martin Luther King, Jr. Day
- - Presidents' Day
- - Good Friday
- - Memorial Day
- - Independence Day
- - Labor Day
- - Thanksgiving Day
- - Other days when the New York Stock Exchange is not open.
The Funds reserve the right not to determine an NAV when:
- - We have not received any orders to purchase, sell or exchange shares
- - Changes in the value of that Fund's portfolio do not affect the NAV.
Bonds, foreign stocks and other securities owned by a Fund may trade on weekends
or other days when the Fund does not price its shares. As a result, the Fund's
net asset value may change on days when you will not be able to purchase or
redeem the Fund's shares. If an event occurs after the close of a foreign
exchange that is likely to affect significantly the Fund's net asset value,
"fair value" pricing may be used. This means that the Fund may value its foreign
holdings at prices other than their last closing prices, and the Fund's net
asset value will reflect this.
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<PAGE> 36
When you purchase shares, your purchase price will be the offering price or NAV
next determined after your order is received, plus any applicable sales load.
CLASS A SALES CHARGES
The charts below show the Class A sales charges, which decrease as the amount of
your investment increases.
Amount of purchase Sales charge as % Sales charge as %
of offering price of amount invested
- ----------------------------------------------------------------------------
Less than $50,000 5.75% 6.10%
$50,000 to $99,999 4.50 4.71
$100,000 to $249,999 3.50 3.63
$250,000 to $499,999 2.50 2.56
$500,000 to $999,999 2.00 2.04
$1 million to $24,999,999 0.50 0.50
$25 million or more 0.25 0.25
- ----------------------------------------------------------------------------
REDUCTION AND WAIVER OF CLASS A SALES CHARGES
Shareholders can reduce or eliminate Class A shares' initial sales charge
through one or more of the discounts described below:
- - INCREASE THE AMOUNT OF YOUR INVESTMENT. The preceding table shows how the
sales charge decreases as the amount of your investment increases.
- - FAMILY MEMBER DISCOUNT. Members of your family who live at the same address
can combine investments, possibly reducing the sales charge.
- - LIFETIME ADDITIONAL DISCOUNT. You can add the value of any of the
Nationwide Mutual Funds Class A shares you already own with the value of
the shares you are purchasing, which may reduce the applicable sales
charge.
- - INSURANCE PROCEEDS OR BENEFITS DISCOUNT PRIVILEGE. If you use the proceeds
of an insurance policy issued by any member of the Nationwide Insurance
Enterprise to purchase Class A shares, you will pay one-half of the
published sales charge if you make your investment 60 days after receiving
the proceeds.
- - NO SALES CHARGE ON A REPURCHASE. If you sell shares from your Nationwide
account, we allow you a one-time privilege to reinvest some or all of the
proceeds in shares of the same class. You will not pay a sales charge on
Class A shares that you buy within 30 days of selling Class A shares of an
equal or lesser amount if you have already paid a sales charge. Remember,
if you realize a gain or a loss on your sale of shares, the transaction is
taxable and reinvestment will not affect the amount of capital gains tax
that is due. If you realize a loss on your sale and your reinvest, some or
all of the loss may not be allowed as a tax deduction depending on the
amount you reinvest.
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<PAGE> 37
- - LETTER OF INTENT DISCOUNT. State in writing that during a 13-month period
you or a group of family members who live at the same address will purchase
or hold at least $_____ in Class A shares and your sales charge will be
based on the total amount you intend to invest. The letter may be backdated
up to 90 days to include previous purchases for determining your sales
charge. Your Letter of Intent is not a binding obligation to buy shares of
a Fund; it is merely a statement of intent. Call 1-800-0920 for more
information.
WAIVER OF CLASS A SALES CHARGES
The Class A sales charges will be waived for purchases made by the following:
- - Any person purchasing through an account with an unaffiliated brokerage
firm that has an agreement with NAS to waive sales charges for those
persons;
- - Directors, officers, full-time employees, sales representatives and their
employees or any investment advisory clients of a broker-dealer having a
dealer/selling agreement with NAS;
- - Any person who pays for the shares with the proceeds of mutual fund shares
sold from an NAS brokerage account. To qualify, you must have paid an
initial sales charge on the shares sold. You must purchase the Class A
shares within 60 days of the sale, and you must request the waiver when you
purchase the Class A shares (NAS may require evidence that you qualify for
this waiver);
- - Employer-sponsored retirement plans, including pension, profit sharing or
deferred compensation plans which are qualified under sections 401(a),
403(b) or 457 of the Internal Revenue Code;
- - Trustees and retired Trustees of Nationwide Mutual Funds (including its
predecessor Trusts);
- - Directors, officers, full-time employees, sales representatives and their
employees, and retired directors, officers, employees, and sales
representatives, their spouses, children or immediate relatives (including
mother, father, brothers, sisters, grandparents and grandchildren) and
immediate relatives of deceased employees of any member of Nationwide
Insurance and Nationwide Financial companies, or any investment advisory
clients of VMF, VSA, NAS and their affiliates;
- - Directors, officers, full-time employees, their spouses, children or
immediate relatives and immediate relatives of deceased employees of any
sponsor group which may be affiliated with the Nationwide Insurance and
Nationwide Financial companies from time to time (including but not limited
to, Farmland Insurance Industries, Inc., Maryland Farm Bureau, Inc., Ohio
Farm Bureau Federation, Inc., Pennsylvania Farmers' Association, Ruralite
Institutionals, Inc., and Southern States Cooperative).
Additional investors eligible for sales charge waivers may be found in the
Statement of Additional Information.
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<PAGE> 38
CONVERSION OF CLASS B SHARES
After you have held your Class B shares for seven years, we will automatically
convert them into Class A shares (without charge), which carry the lower 12b-1
fee. We will also convert any Class B shares that you purchased with reinvested
dividends and other distributions for those shares at that time. Remember,
because the NAV of Class A shares is usually higher than the NAV of Class B
shares, you may receive fewer Class A shares than the number of Class B shares
converted, but the total dollar value will be the same. We do the conversion on
the first business day of the month following the seventh anniversary of the
date of your purchase.
HOW TO PLACE YOUR PURCHASE ORDER
BY MAIL - Complete and mail the application with a check or money order made
payable to: Nationwide Advisory Services, Inc., Three Nationwide Plaza, P.O. Box
1492, Columbus, Ohio 43216-1492. Payment must be made in U.S. dollars only and
drawn on a U.S. bank. NAS will not accept third-party checks.
BY WIRE - You can request that your bank transmit funds ("federal funds") by
wire to the Funds' custodian bank. In order to use this method, you must call
NAS by 4 p.m. Eastern Standard Time, and the wire must be received by the
custodian bank by the close of business on the day you placed your order or your
order will be cancelled. You may be liable for any loss to the Funds resulting
from the cancellation. Your bank may charge a fee to wire funds. If you choose
this method to open your account, you must call our toll-free number before you
wire your investment, and you must then complete and fax the application.
BY TELEPHONE (NAS NOW) - Call 1-800-637-0012, our automated voice-response
system, 24 hours a day, seven days a week, for easy access to mutual fund
information. You can choose from a menu of choices to conduct transactions and
hear fund price information, mailing and wiring instructions and other mutual
fund information. You must complete the appropriate section of the application
to use NAS NOW to make purchases.
THROUGH AN AUTHORIZED BROKER - NAS has relationships with certain brokers who
are authorized to accept, or designate intermediaries to accept, purchase and
redemption orders for the Funds. If you purchase through such a broker, your
order will be priced at the NAV next determined after your broker or its
designated intermediary accepts it. Contact your broker to determine whether it
has an established relationship with NAS.
BY ON-LINE ACCESS- You may use your personal computer to access on-line trading
of the Fund's shares at our website (www.nationwidefunds.com). To establish this
service you must first register through the website. We will then send to you,
by mail, an account access password that will enable you to make transactions.
When you click on one of the Fund's icons, you will be prompted to enter your
trading password so that the Fund can be sure each purchase is secure. For your
own protection, only you or your co-account holder(s) should place orders
through your
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<PAGE> 39
Fund account. When you purchase shares you will be asked to provide
your e-mail address and affirm that you have read the Prospectus. The Fund's
Prospectus is readily available for viewing on the website. The Funds may
terminate the ability to buy Fund shares on its website at any time, in which
case you may continue to buy shares by mail, wire or telephone pursuant to the
Prospectus.
ADDITIONAL SHAREHOLDER SERVICES
Shareholders are entitled to a wide variety of services by contacting:
NAS NOW 1-800-637-0012
Our customized voice-response system, available 24 hours a day, seven days a
week
CUSTOMER SERVICE 1-800-848-0920
Representatives are available to answer questions between 8 a.m. and 5 p.m.
Eastern Standard Time
For additional information on buying shares and shareholder services, call our
customer service number or contact your Nationwide representative.
SELLING SHARES
You can sell - also known as redeeming - your shares of the Funds at any time,
subject to certain restrictions. The price you will receive when you sell your
shares will be the NAV (less any applicable sales charges) next determined after
NAS receives your properly completed order to sell in its offices in Columbus,
Ohio. Of course, the value of the shares you sell depends upon the market value
of the investments of the Fund at the time of the sale, and the value may be
more or less than you paid for the shares.
Your order to sell shares can be made in writing or by telephone (if you
authorized telephone transactions on your application). Generally, we will pay
you for the shares that you sell within three days after receiving your order to
sell. Payment for shares you recently purchased by check may be delayed until
the check clears, which may take up to 12 calendar days from the date of your
purchase.
RESTRICTIONS ON SALES
You may not be able to sell your shares of the Funds or we may delay paying you
the proceeds from a sale when the New York Stock Exchange is closed (other than
customary weekend and holiday closings) or if trading is restricted or if an
emergency exists.
SIGNATURE GUARANTEE
A signature guarantee is required under the following circumstances:
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<PAGE> 40
- - if a redemption is over $100,000,
- - if your account registration has changed within the last 30 days,
- - if the redemption check is made payable to anyone other than the registered
shareholder,
- - if the proceeds are sent to a bank account not previously designated or
changed within the past 30 days, or
- - if the proceeds are mailed to an address other than the address of record
NAS reserves the right to require a signature guarantee in other circumstances,
without notice.
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON CLASS A AND CLASS B SHARES
You must pay a CDSC if you sell Class B shares within six years of purchase,
unless you are entitled to a waiver. The sales charge applies if your sale
causes the value of your account to fall below the total amount of all purchases
you made during the preceding six years. The sales charge is applied to your
original purchase price, or the current market value of the shares being sold,
whichever is less. The amount of the sales charge will decrease as illustrated
in the following chart:
Sale within 1 year 2 years 3 years 4 years 5 years 6 years 7 years or more
- -----------------------------------------------------------------------------
Sales Charge 5% 4% 3% 3% 2% 1% 0%
All purchases during the month are grouped together and will be treated as if
made on the last day of the preceding month.
We do not impose a CDSC on Class B shares purchased through reinvested dividends
and distributions. If you sell your Class B shares and reinvest the proceeds in
Class B shares within 30 days, NAS will deposit an amount equal to any CDSC you
paid into your account. Also, we will waive the CDSC if you sell shares
following the death or disability of a shareholder, provided the sale occurs
within one year of the shareholder's death or a determination of disability and
for mandatory withdrawals from IRA accounts after age 70 1/2 years. For more
information, see the Statement of Additional Information.
Under certain circumstances, employer-sponsored retirement plans investing in
Class A shares without a sales charge (other than those investing in the Funds
through variable insurance products) may be charged a CDSC if shares are
redeemed within three years after purchase. The CDSC will be 1% for the first
year, 0.50% for the second year and 0.25% for the third year.
Under certain circumstances, employer-sponsored retirement plans investing in
Class A shares without a sales charge (other than those investing in the Funds
through variable insurance products) may be charged a CDSC if shares are
redeemed within three years after purchase. The CDSC will be 1% for the first
year, 0.50% for the second year and 0.25% for the third year.
HOW TO PLACE YOUR SALE ORDER
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You can request the sale of your shares in any of the ways below. A signature
guarantee may be required under certain circumstances. Please refer back to
"Signature Guarantee" on page ____.
BY TELEPHONE (NAS NOW) - Calling 1-800-637-0012 connects you to our automated
voice-response system, available 24 hours a day, seven days a week, for easy
access to mutual fund information. You can sell shares and have the check mailed
to your address of record, unless you declined this option on your application.
Only the following types of accounts can use NAS NOW to sell shares: Individual,
Joint, Transfer on Death, Trust, and Uniform Gift/Transfer to Minor accounts.
You can call 1-800-637-0012 after 7 p.m. Eastern Standard Time to learn the
day's closing share price.
CAPITAL GAINS TAXES
================================================================================
If you sell Fund shares for more than you paid for them, you may have capital
gains, which are subject to federal (and in some cases, state) income tax. For
more information, see "Distributions and Taxes - Selling Fund Shares."
================================================================================
CUSTOMER SERVICE LINE - Unless you declined the telephone redemption privilege
on your application, you can call and request that a check payable to the
shareholder of record be mailed to the address of record. NAS can wire the funds
directly to your account at a commercial bank (a voided check must be attached
to your application) unless you declined telephone privileges on your
application. (This authorization will remain in effect until you give NAS
written notice of its termination.) You can sell shares of your IRA by telephone
if we receive the proper forms. The distribution from an IRA will be subject to
a mandatory 10% federal withholding tax, unless you inform us in writing not to
withhold taxes. For additional information or to request the forms, please call
the customer service line at 1-800-848-0920. The Funds will use procedures to
confirm that telephone instructions are genuine. If the Funds act on
instructions it reasonably believed were genuine, it will not be liable for any
loss, injury, damage or expense that occurs as a result, and the Funds will be
held harmless for any loss, claims or liability arising from its compliance with
the instructions. NAS may record telephone instructions to sell shares. The
Funds reserve the right to revoke this privilege at any time, without notice to
shareholders, and to request the sale in writing, signed by all shareholders on
the account.
BY BANK WIRE - Your funds will be wired to your bank on the next business day
after your order to sell shares has been processed. We will deduct a $20 fee
from the proceeds of your sale for this Institutional . Your financial
institution may also charge you a fee for receiving the wire. Funds sent outside
the U.S. may be subject to a higher fee.
BY AUTOMATED CLEARING HOUSE ("ACH") - Your funds can be sent to your bank via
ACH on the second business day after your order to sell has been received by
NAS. Funds sent through ACH should reach your bank in two business days. There
is no fee for this service. (This authorization will remain in effect until you
give NAS written notice of its termination.)
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<PAGE> 42
BY MAIL OR FAX (No minimum) - Write a letter to Nationwide Advisory Services,
Inc., Three Nationwide Plaza, P.O. Box 1492, Columbus, Ohio 43216-1492 or fax it
to 614-249-8705. Please be sure your letter is signed by all account owners. Be
sure to include your account number and the Fund from which you wish to make a
redemption. For a distribution from an IRA, you must include your date of birth
and indicate whether or not you want NAS to withhold federal income tax from
your proceeds. Your sale of shares will be processed on the date NAS receives
your signed letter or fax. If your fax is received after 4 p.m. Eastern Standard
Time, it will be processed the next business day. NAS reserves the right to
require the original document if you fax your letter. THROUGH AN AUTHORIZED
BROKER - NAS has relationships with certain brokers who are authorized to
accept, or designate intermediaries to accept, purchase and redemption orders
for the Funds. If you have an account with such a broker, your redemption order
will be priced at the NAV next determined after your order has been accepted by
your broker or its designated intermediary.
BY ON-LINE ACCESS - You may use your personal computer to access on-line trading
of the Fund's shares at our website (www.nationwidefunds.com). To establish this
service you must first register through the website. We will then send to you,
by mail, an account access password that will enable you to make transactions.
When you click on one of the Fund's icons, you will be prompted to enter your
trading password so that the Fund can be sure each sale is secure. For your own
protection, only your or your co-account holder(s) should place orders through
your Fund account. When you sell shares you will be asked to provide your e-mail
address and affirm that you have read the Prospectus. The Fund's Prospectus is
readily available for viewing on the website. The Funds may terminate the
ability to sell Fund shares on its website at any time, in which case you may
continue to sell shares by mail or wire pursuant to the Prospectus.
ACCOUNTS WITH LOW BALANCES
We may sell the rest of your shares and close your account if you make a sale
that reduces the value of your account to less than $250. Before the account is
closed, we will give you notice and allow you 90 days to purchase additional
shares to avoid this action. We do this because of the high cost of maintaining
small accounts. This does not apply to Automatic Asset Accumulation accounts.
For additional information on selling your shares, call our customer service
line at 1-800-848-0920 or see your Nationwide representative.
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<PAGE> 43
DISTRIBUTION PLAN
In addition to the sales charges which you may pay for Class A and Class B
shares, the Trust has adopted a Distribution Plan under Rule 12b-1 of the
Investment Company Act, which permits the Funds to compensate NAS - as
distributor - for expenses associated with distributing its shares and providing
shareholder services.
Under the Distribution Plan, the Funds pay NAS compensation accrued daily and
paid monthly. Class A shares of each Fund pay an amount not exceeding, on an
annual basis, 0.25% of the Class A shares' average daily net assets. Class B
shares of each Fund pay an amount not exceeding, on an annual basis, 1.00% of
the Class B shares' average daily net assets. Because these fees are paid out of
the Funds' assets on an ongoing basis, over time these fees will increase the
cost of your investment and may cost you more than paying other types of sales
charges.
EXCHANGING SHARES
You can exchange the shares you own for shares of another Fund within Nationwide
Mutual Funds (except the Morley Capital Accumulation Fund) as long as they are
the same class of shares, both accounts have the same owner, and your first
purchase in the new Fund meets the Fund's minimum investment requirement. You
can't exchange Class A shares for Class B shares.
There is no sales charge for exchanges of Class A shares or Institutional Class
shares. If you exchange Shares of the Nationwide Money Market Fund into another
Fund, you must pay the applicable sales charge, unless it has already been paid.
If you exchange Class B shares for Prime Shares of the Nationwide Money Market
Fund, the time you hold the shares in the Money Market Fund will not be counted
for purposes of calculating any CDSC. If you then sell your Prime Shares of the
Money Market Fund, you will pay the sales charge that would have been charged if
the shares had been sold at the time they were exchanged into the Money Market
Fund. If you exchange your Prime Shares of the Money Market Fund back into Class
B shares, the time you hold Class B shares prior to the exchange will be counted
for purposes of calculating the CDSC.
CAPITAL GAINS TAXES
Exchanging shares is considered a sale and purchase of shares for federal and
state income tax purposes. Therefore, if the shares you exchange are worth more
than you paid for them, you may have to pay federal and/or state income taxes.
For more information, see "Distribution and Taxes - Exchanging Fund Shares."
HOW TO PLACE YOUR EXCHANGE ORDER
You can request an exchange of shares in writing, by fax, by phone or by on-line
access (see "Buying Shares - How to place your purchase order" or the back cover
for contact information). If you make your request in writing, please be sure
all account holders sign the letter.
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<PAGE> 44
Your exchange will processed on the date NAS receives your signed letter or fax.
If your fax is received after 4 p.m. Eastern Standard Time, it will be processed
the next day. If you fax your request, we reserve the right to ask for the
original. You can automatically request an exchange 24 hours a day, seven days a
week, by calling NAS NOW, our automated voice-response system. You will have
automatic exchange privileges unless you request not to on your application. The
Trust reserves the right to amend or discontinue these exchange privileges upon
60 days written notice to shareholders.
EXCESSIVE TRADING
The Trust reserves the right to reject any exchange request it believes will
increase transaction costs, or otherwise adversely affect other shareholders. A
Fund may delay forwarding redemption proceeds for up to seven days if the
investor redeeming shares is engaged in excessive trading, or if the amount of
the redemption request otherwise would be disruptive to efficient portfolio
management, or would adversely affect the Fund.
YEAR 2000
VSA and NAS have developed and implemented a plan to address issues related to
the Year 2000. The problem relates to many existing computer systems using only
two digits to identify a year in a date field. These systems were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected, many computer systems could fail or create erroneous results
when processing information dated after December 31, 1999. VSA and NAS have
completed an inventory and assessment of all computer systems and have
implemented a plan to renovate or replace all applications that were identified
as not Year 2000 compliant. VSA and NAS have also tested each application for
its Year 2000 compliance.
Systems supporting the Funds' infrastructure, such as telecommunications, voice
and networks, have also been tested, renovated or replaced, and are compliant.
VSA's and NAS' assessment of Year 2000 issues has included non-information
technology systems with embedded computer chips. VSA's and NAS' building systems
such as fire, security, elevators and escalators supporting facilities in
Columbus, Ohio, have been tested and are Year 2000 compliant.
In addition to resolving internal 2000 readiness issues, VSA and NAS are
surveying significant external organizations (business partners) to assess if
they will be Year 2000 compliant. VMF, VSA, and NAS continue their efforts to
identify external risk factors and have developed contingency plans as part of
their ongoing risk-management strategy.
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<PAGE> 45
DISTRIBUTIONS AND TAXES
The following information is provided to help you understand the income and
capital gains you can earn from owning Fund shares, as well as the federal taxes
you may have to pay on this income. For up-to-date tax advice, please speak with
your tax adviser. In this section, "we" and "our" refer to "NAS". "You" and
"your" mean shareholders and potential investors.
DISTRIBUTIONS OF INCOME DIVIDENDS
The Small Cap Index, Mid Cap Index and International Index Funds distribute any
available income dividends to shareholders at least annually. The Bond Index
Fund distributes any available income dividends to shareholders on a monthly
basis. Income dividends are taxable to you as ordinary income for federal income
tax purposes, unless you hold your shares in a qualified tax-deferred plan or
account, or are otherwise not subject to federal income tax. The amount of
income dividends distributed to you will be reported in a Form 1099, which we
will send to you during the tax season each year (unless you hold your shares in
a qualified tax-deferred plan or account). For corporate shareholders, a portion
of each year's distributions may be eligible for the corporate dividend-received
deduction.
DISTRIBUTIONS OF CAPITAL GAINS
If a Fund has net realized capital gains at the end of the fiscal year (meaning
the gains from sales of securities exceed any losses from sales), it will
distribute this capital gain to shareholders annually. You must pay federal
income taxes on any capital gains distributed to you, unless you hold your
shares in a qualified tax-deferred plan or account. On Form 1099, we will report
the amount of net short-term capital gains and net long-term capital gains
distributed to you during the year. Currently, for individuals, long-term
capital gains are taxed at a maximum rate of 20%; short-term capital gains are
taxed as ordinary income, such as interest or dividends. For the current capital
gains tax rates, speak with your tax adviser.
REINVESTING DISTRIBUTIONS
All income and capital gains distributions will be reinvested in shares of the
Fund. You may request a payment in cash in writing if distributions are in
excess of $5. If distribution checks (1) are returned and marked as
"undeliverable" or (2) remain uncashed for six months, your account will be
changed automatically so that all future distributions are reinvested in our
account. Checks that remain uncashed for six months will be canceled and the
money reinvested in the applicable Fund as of the cancellation date. No interest
is paid during the time the check is outstanding. You are subject to tax on
reinvested distributions.
You may be subject to federal backup withholding at a rate of 31% of each
distribution unless you certify that the taxpayer identification number you gave
us is correct, and that you are not subject to withholding. (We will, however,
withhold taxes if the Internal Revenue Service
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<PAGE> 46
notifies us that such certificates are not accurate, or as may otherwise be
required under the Internal Revenue Code.)
CHANGING YOUR DISTRIBUTION OPTION
If you want to change your distribution option, you must notify us by the record
date for a dividend or distribution in order for it to be effective for that
dividend or distribution
STATE AND LOCAL TAXES
Distributions may be subject to state and local taxes, even if not subject to
federal income taxes. State and local tax laws vary; please consult your tax
adviser.
SELLING FUND SHARES
Selling Fund shares for more than you paid for them gives you a capital gain,
which is subject to federal income tax. The amount of tax depends on how long
you held your shares. For individuals, long-term capital gains are currently
taxed at a maximum rate of 20%; and short-term capital gains are taxed as
ordinary income, such as interest or dividends. Capital gains from your sale of
Fund shares is not reported on Form 1099; you or your tax adviser should keep
track of your purchases, sales, and any resulting gain or loss. If you do sell
Fund shares for a loss, you may be able to use this capital loss to offset any
capital gains you have.
EXCHANGING FUND SHARES
Exchanging your shares of one Fund for another Fund is considered a sale for
income tax purposes. Therefore, if the shares you exchange are worth more than
you paid for them, you have capital gains, which are subject to the federal
income taxes described above. If you exchange Fund shares for a loss, you may be
able to use this capital loss to offset any capital gains you have.
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[BACK COVER]
INFORMATION FROM NATIONWIDE
Please read this Prospectus before you invest, and keep it with your records.
The following document contains additional information about the Funds. To
obtain a document free of charge, contact us at the address or number listed
below.
- - Statement of Additional Information (SAI) (incorporated by reference into
this Prospectus)
FOR ADDITIONAL INFORMATION CONTACT:
Nationwide Advisory Services, Inc.
P.O. Box 1492
Three Nationwide Plaza
Columbus, OH 43216-1492
(614) 249-8705 (fax)
FOR INFORMATION, ASSISTANCE AND WIRE ORDERS:
1-800-848-0920 (toll free, 8 a.m. - 5 p.m. Eastern Standard Time)
FOR 24-HOUR ACCOUNT ACCESS:
1-800-637-0012 (toll free)
Also, visit the Nationwide Funds' Web site at
www.nationwidefunds.com
INFORMATION FROM THE SECURITIES AND EXCHANGE COMMISSION You can obtain copies of
Fund documents from the SEC as follows:
IN PERSON:
Public Reference Room in Washington, D.C. (for their hours of operation, call
1-800-SEC-0330)
BY MAIL:
Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-6009
(The SEC charges a fee to copy any documents.)
VIA THE INTERNET:
http://ww.sec.gov
Investment Company Act File No. 811-08495
Nationwide Mutual Funds
Three Nationwide Plaza
Columbus, Ohio 43215-2220
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<PAGE> 49
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER __, 1999
NATIONWIDE MUTUAL FUNDS
NATIONWIDE SMALL CAP INDEX FUND
NATIONWIDE MID CAP INDEX FUND II
NATIONWIDE INTERNATIONAL INDEX FUND
NATIONWIDE BOND INDEX FUND
(COLLECTIVELY, THE "INDEX FUNDS")
INVESTOR DESTINATIONS AGGRESSIVE FUND (THE "AGGRESSIVE FUND")
INVESTOR DESTINATIONS MODERATELY AGGRESSIVE FUND (THE "MODERATELY AGGRESSIVE
FUND")
INVESTOR DESTINATIONS MODERATE FUND (THE "MODERATE FUND")
INVESTOR DESTINATIONS MODERATELY CONSERVATIVE FUND (THE "MODERATELY CONSERVATIVE
FUND")
INVESTOR DESTINATIONS CONSERVATIVE FUND (THE "CONSERVATIVE FUND")
(COLLECTIVELY, THE "INVESTOR DESTINATIONS SERIES")
Nationwide Mutual Funds (the "Trust") is a registered open-end
investment company consisting of 29 series as of the date hereof. This Statement
of Additional Information relates to nine series of the Trust, consisting of the
Index Funds and the Investor Destinations Series (each, a "Fund" and
collectively, the "Funds").
This Statement of Additional Information is not a prospectus but the
Statement of Additional Information is incorporated by reference into the
Prospectuses for the Funds. It contains information in addition to and more
detailed than that set forth in the Prospectuses dated December __, 1999, and
should be read in conjunction with the Prospectuses. Terms not defined in this
Statement of Additional Information have the meanings assigned to them in the
Prospectuses. The Prospectuses may be obtained from Nationwide Advisory
Services, Inc., P.O. Box 1492, Three Nationwide Plaza, Columbus, Ohio 43215, or
by calling toll free 1-800-848-0920.
<PAGE> 50
TABLE OF CONTENTS PAGE
General Information and History...............................................1
Additional Information on Portfolio Instruments and Investment Policies.......1
Description of Portfolio Investments and Investment Policies..................8
Investment Restrictions......................................................33
Trustees and Officers of the Trust...........................................35
Investment Advisory and Other Services.......................................37
Brokerage Allocation.........................................................52
Additional Information on Purchases and Sales................................57
Valuation of Shares..........................................................59
Investor Strategies..........................................................61
Investor Privileges..........................................................62
Investor Services............................................................64
Fund Performance Advertising.................................................65
Additional Information.......................................................66
Additional General Tax Information...........................................68
Major Shareholders...........................................................72
Appendix A - Bond Ratings....................................................73
i
<PAGE> 51
GENERAL INFORMATION AND HISTORY
Nationwide Mutual Funds (the "Trust"), formerly Nationwide Investing
Foundation III (NIF III), is an open-end management investment company organized
under the laws of Ohio by a Declaration of Trust, dated as of October 30, 1997,
as subsequently amended. The Trust currently offers shares in twenty-eight (28)
separate series, each with its own investment objective. Each of the nine Funds
discussed in this Statement of Additional Information is a non-diversified fund
as defined in the Investment Company Act of 1940.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES
THE INDEX FUNDS
Each Index Fund's investment objective is to provide investment results
that, before expenses, seek to replicate the total return (i.e., the combination
of capital changes and income) of a specified securities index. Each Fund will
seek to achieve its objective by investing all of its assets in the series
(collectively, the "Series," and each, a "Series") of Quantitative Master Series
Trust that has the same investment objective as the Fund. Each Fund's investment
experience will correspond directly to the investment experience of the
respective Series in which it invests. All investments will be made at the level
of the Series. There can be no assurance that the investment objectives of the
Funds will be achieved.
The Funds' investment objectives are not fundamental policies and may
be changed by the Board of Trustees of the Trust without shareholder approval.
The Trustees may also change the target index of any Index Fund if they consider
that a different index would facilitate the management of the Fund in a manner
which better enables the Fund to seek to replicate the total return of the
market segment represented by the current index.
Small Cap Index Fund. The investment objective of the Small Cap Index
Fund is to match the performance of the Russell 2000(R) Index (the "Russell
2000") as closely as possible before the deduction of Fund expenses. There can
be no assurance that the investment objective of the Fund will be achieved.
The Fund seeks to achieve its investment objective by investing all of
its assets in the Master Small Cap Series of Quantitative Master Series Trust
("Small Cap Series"), which has the same investment objective as the Fund.
Mid Cap Index Fund II. The investment objective of the Mid Cap Index
Fund II is to match the performance of the Standard & Poor's Mid Cap 400(R)
Index (the "S&P 400")(1) as closely as
- --------
(1)"Standard & Poor's", "S&P", "S&P 400", "Standard & Poor's 400", and "400" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by
the Fund. The Fund is not sponsored, endorsed, sold or promoted by Standard &
Poor's and Standard & Poor's makes no representation regarding the advisability
of investing in the Fund. See "Additional Information Concerning the Indices"
herein for more information.
1
<PAGE> 52
possible before the deduction of Fund expenses. There can be no assurance that
the investment objective of the Fund will be achieved.
The Fund seeks to achieve its investment objective by investing all of
its assets in the Master Mid Cap Series of Quantitative Master Series Trust
("Mid Cap Series"), which has the same investment objective as the Fund.
Bond Index Fund. The investment objective of the Bond Index Fund is to
match the performance of the Lehman Brothers Aggregate Bond Index (the
"Aggregate Bond Index") as closely as possible before the deduction of Fund
expenses. There can be no assurance that the investment objective of the Fund
will be achieved.
The Fund seeks to achieve its investment objective by investing all of
its assets in the Master Aggregate Bond Series of Quantitative Master Series
Trust ("Aggregate Bond Series"), which has the same investment objective as the
Fund. The following supplements the information contained in the Prospectus
regarding the investment policies of the Bond Index Fund.
The Aggregate Bond Index is composed primarily of dollar-denominated
investment grade bonds in the following classes: U.S. Treasury and agency
securities, U.S. corporate bonds, foreign corporate bonds, foreign sovereign
debt (debt securities issued or guaranteed by foreign governments and
governmental agencies), supranational debt (debt securities issued by entities,
such as the World Bank, constituted by the governments of several countries to
promote economic development) and mortgage-backed securities with maturities
greater than one year. Corporate bonds contained in the Aggregate Bond Index
represent issuers from various industrial sectors.
The Bond Index Fund may invest in U.S. Treasury bills, notes and
bonds and other "full faith and credit" obligations of the U.S. Government. The
Bond Index Fund may also invest in U.S. Government agency securities, which are
debt obligations issued or guaranteed by agencies or instrumentalities of the
U.S. Government. "Agency" securities may not be backed by the "full faith and
credit" of the U.S. Government. U.S. Government agencies may include the Federal
Farm Credit Bank, the Resolution Trust Corporation and the Government National
Mortgage Association. "Agency" obligations are not explicitly guaranteed by the
U.S. Government and so are perceived as somewhat riskier than comparable
Treasury bonds.
Because the Aggregate Bond Index is composed of investment grade bonds,
the Bond Index Fund will invest in corporate bonds rated investment grade i.e.,
those rated at least Baa3 by Moody's Investors Service, Inc. ("Moody's") or BBB
by Standard & Poor's Ratings Group ("S&P"), the equivalent by another nationally
recognized statistical rating organization ("NRSRO") or, if unrated, of equal
quality in the opinion of Fund Asset Management, L.P. as the investment adviser
to the Series ("Fund Asset Management"). Corporate bonds ranked in the fourth
highest rating category, while considered "investment grade", have more
speculative characteristics and are more likely to be downgraded than securities
rated in the three highest ratings categories. In the event that the rating of a
security in the Bond Index Fund is lowered below Baa or BBB, the Bond Index Fund
may
2
<PAGE> 53
continue to hold the security. Such securities rated below investment grade are
considered to be speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation.
Descriptions of the ratings of bonds are contained in the Appendix.
The Bond Index Fund may also invest in other instruments that "pass
through" payments on such obligations, such as collateralized mortgage
obligations ("CMOs").
International Index Fund. The investment objective of the International
Index Fund is to match the performance of the Morgan Stanley Capital
International EAFE(R) Capitalization Weighted Index (the "EAFE Index") as
closely as possible before the deduction of Fund expenses. There can be no
assurance that the investment objective of the Fund will be achieved.
The Fund seeks to achieve its investment objective by investing all of
its assets in the Master International (Capitalization Weighted) Series of
Quantitative Master Series Trust ("International Series"), which has the same
investment objective as the Fund.
About Indexing. The Index Funds are not managed according to
traditional methods of "active" investment management, which involve the buying
and selling of securities based upon economic, financial, and market analyses
and investment judgment. Instead, each Index Fund, utilizing essentially a
"passive" or "indexing" investment approach, seeks to replicate, before each
Fund's expenses (which can be expected to reduce the total return of the Fund),
the total return of its respective index.
Indexing and Managing the Funds. Each Index Fund will be substantially
invested in securities in the applicable index, and will invest at least 80% of
its assets in securities or other financial instruments which are contained in
or correlated with securities in the applicable index (equity securities, in the
case of the Small Cap Index Fund, Mid Cap Index Fund II and International Index
Fund, and fixed-income securities in the case of the Bond Index Fund ).
Because each Index Fund seeks to replicate the total return of its
respective index, generally Fund Asset Management will not attempt to judge the
merits of any particular security as an investment but will seek only to
replicate the total return of the securities in the relevant index. However,
Fund Asset Management may omit or remove a security which is included in an
index from the portfolio of an Index Fund if, following objective criteria, Fund
Asset Management judges the security to be insufficiently liquid or believes the
merit of the investment has been substantially impaired by extraordinary events
or financial conditions.
Fund Asset Management may acquire certain financial instruments based
upon individual securities or based upon or consisting of one or more baskets of
securities (which basket may be based upon a target index). Certain of these
instruments may represent an indirect ownership interest in such securities or
baskets. Others may provide for the payment to an Index Fund or by an Index Fund
of amounts based upon the performance (positive, negative or both) of a
particular security or basket. Fund Asset Management will select such
instruments when it believes that the use of the instrument will correlate
substantially with the expected total return of a target security or index. In
connection with the use of such instruments, Fund Asset Management may enter
into short sales
3
<PAGE> 54
in an effort to adjust the weightings of particular securities represented in
the basket to more accurately reflect such securities, weightings in the target
index.
The ability of each Index Fund to satisfy its investment objective
depends to some extent on Fund Asset Management's ability to manage cash flow
(primarily from purchases and redemptions and distributions from the Fund's
investments). Fund Asset Management will make investment changes to an Index
Fund's portfolio to accommodate cash flow while continuing to seek to replicate
the total return of the Series' target index. Investors should also be aware
that the investment performance of each index is a hypothetical number which
does not take into account brokerage commissions and other transaction costs,
custody and other costs of investing, and any incremental operating costs (e.g.,
transfer agency, accounting) that will be borne by the Funds. Finally, since
each Index Fund seeks to replicate the total return of its target index, Fund
Asset Management generally will not attempt to judge the merits of any
particular security as an investment.
Each Index Fund's ability to replicate the total return of its
respective index may be affected by, among other things, transaction costs,
administration and other expenses incurred by the Fund, taxes (including foreign
withholding taxes, which will affect the International Index Fund and the Bond
Index Fund due to foreign tax withholding practices), changes in either the
composition of the index or the assets of a Fund, and the timing and amount of
Series investor contributions and withdrawals, if any. In addition, each Index
Fund's total return will be affected by incremental operating costs (e.g.,
transfer agency, accounting) that will be borne by the Fund. Under normal
circumstances, it is anticipated that each Index Fund's total return over
periods of one year and longer will, on a gross basis and before taking into
account expenses (incurred at either the Series or the Fund level) be within 100
basis points (a basis point is one one-hundredth of one percent (0.01%)) for the
Small Cap Index Fund, ____ basis points for the Mid Cap Index Fund II, 150 basis
points for the International Index Fund, and 50 basis points for the Bond Index
Fund, of the total return of the applicable indices. There can be no assurance,
however, that these levels of correlation will be achieved. In the event that
this correlation is not achieved over time, the Trustees will consider
alternative strategies for the Funds. Information regarding correlation of an
Index Fund's performance to that of a target index will be reported in the
Funds' annual report.
THE INVESTOR DESTINATIONS SERIES
The Prospectus for the Investor Destinations Series discusses the
investment objectives and strategies for each Series and explains the types of
underlying mutual funds (the "Underlying Funds") that each Series may invest in.
Each of the Investor Destinations Series is a "fund of funds," which means that
each Fund invests primarily in other mutual funds. Underlying Funds invest in
stocks, bonds and other securities and reflect varying amounts of potential
investment risk and reward. Each of the Investor Destinations Series allocates
its assets among the different Underlying Funds and - except for The Aggressive
Fund, - the Nationwide contract. Periodically, each Fund will adjust its asset
allocation within predetermined ranges to ensure broad diversification and to
adjust to changes in market conditions. However, as a general mater, there will
not be large, sudden changes in a Fund's asset allocation.
The following is a list of the mutual funds that are part of the
Nationwide group of funds (the
4
<PAGE> 55
"Nationwide funds") that the Series may currently invest in. This list may be
updated from time to time. Villanova Mutual Fund Capital Trust ("VMF") is the
investment adviser to each of the Nationwide funds, except for Morley Enhanced
Income Fund which is advised by Union Bond & Trust Company, an affiliated
company of VMF. As described below, VMF has employed a subadviser for the
Nationwide S&P 500 Index Fund.
- - Nationwide International Index Fund
- - Nationwide Small Cap Index Fund
- - Nationwide Mid Cap Index Fund II
- - Nationwide S&P 500 Index Fund
- - Nationwide Bond Index Fund
- - Morley Enhanced Income Fund
- - Nationwide Money Market Fund
Nationwide Small Cap Index Fund, Nationwide Mid Cap Index Fund II,
Nationwide International Index Fund and Nationwide Bond Index Fund are further
described in this Statement of Additional Information and in their Prospectus.
The following is a brief description of Nationwide S&P 500 Index Fund, Morley
Enhanced Income Fund and Nationwide Money Market Fund, three other series of the
Trust:
Nationwide S&P 500 Index Fund. Nationwide S&P Index Fund seeks to
provide investment results that correspond to the price and yield performance of
publicly traded common stocks, as represented by the Standard & Poor's Composite
Stock Price Index.2 The Fund attempts to duplicate the investment results of the
Index, which is composed of 500 selected common stocks, most of which are listed
on the New York Stock Exchange. Standard & Poor's chooses the stocks to be
included in the Index based on a number of criteria including industry group
representations, market value, economic sector and operating/financial
condition. The Fund attempts to be fully invested at all time in the stocks that
comprise the Index and stock index futures.
Morley Enhanced Income Fund. The Nationwide Enhanced Income Fund seeks
to provide a high level of current income while preserving capital and
minimizing market fluctuations in an investor's account value. To achieve its
goals, under normal market conditions, the Enhanced Income Fund invests
primarily in high-grade debt securities issued by the U.S. government and its
agencies, as well as by corporations. The Enhanced Income Fund also purchases
mortgage-backed and asset-backed securities. The debt securities in which the
Enhanced Income Fund invests pay interest on either a fixed-rate or
variable-rate basis. The Enhanced Income Fund will be managed so that its
duration will be less than 2.0 years. Depending upon market conditions, the
Enhanced Income Fund may also enter into book value maintenance agreements
("wrap contracts") with one or more highly rated financial institutions for the
purpose of maintaining some of the
- --------
(2)"Standard & Poor's", "S&P", "S&P 500", "Standard & Poor's 500" and "500" are
trademarks of The McGraw-Hill companies, Inc. and have been licensed for use by
Nationwide S&P 500 Index Fund. The Fund is not sponsored, endorsed, sold or
promoted by Standard & Poor's and Standard & Poor's makes no representation
regarding the advisability of investing in the Fund. See "Additional Information
Concerning the Indices" herein for more information.
5
<PAGE> 56
Enhanced Income Fund's assets at a stable book value. The Enhanced Income Fund's
portfolio managers expect that careful selection of securities, relatively short
portfolio duration, and the potential availability and use of wrap contracts
will enable the Enhanced Income Fund to meet its investment objective of limited
fluctuation of the Enhanced Income Fund's net asset value, although there can be
no guarantee that the Fund will achieve its objectives.
Nationwide Money Market Fund. The Nationwide Money Market Fund seeks as
high a level of current income as is consistent with the preservation of capital
and the maintenance of liquidity. It seeks to achieve this objective by
investing in high-quality money market obligations maturing in 397 days or less,
including corporate obligations, U.S. Government and agency bonds, bills and
notes, the obligations of foreign governments, and the obligations of U.S. banks
and U.S. branches of foreign banks if they are denominated in U.S. dollars. The
Fund may also invest in floating and adjustable-rate obligations and
asset-backed commercial paper. Typically, the Fund's dollar-weighted average
maturity will be 90 days or less.
The Fund invests in securities which the portfolio manager believes to
have the best return potential. Because the Fund invests in short-term
securities, it will generally sell securities only to meet liquidity needs, to
maintain target allocations and to take advantage of more favorable
opportunities.
GENERALLY
For simplicity, with respect to investment objective and policies of
each Fund, this Statement of Additional Information, like the Prospectus for the
Index Funds, uses the term "Fund" to include the underlying Series or Underlying
Funds in which the Fund invests. Please review the discussions in the
Prospectuses for further information regarding the investment objectives and
policies of each Fund, including their respective underlying Series or Fund.
The Funds invest in a variety of securities and employ a number of
investment techniques that involve certain risks. The Prospectuses for the Funds
highlight the principal investment strategies, investment techniques and risks.
The following table sets forth additional information concerning permissible
investments and techniques for each of the Funds (including their respective
underlying Series and Underlying Fund). A "Y" in the table indicates that the
Fund may invest in or follow the corresponding instrument or technique. An empty
box indicates that the Fund does not intend to invest in or follow the
corresponding instrument or technique.
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<PAGE> 57
<TABLE>
<CAPTION>
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Moder- Moder-
Small Mid Inter- ately ately
Cap Cap national Bond Aggre- Aggre- Moder- Conser- Conser-
Index Index Index Index ssive ssive ate vative vative
TYPE OF INVESTMENT OR TECHNIQUE Fund Fund II Fund Fund Fund Fund Fund Fund Fund
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. common stocks Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Small company stocks Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Special situation companies Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Illiquid securities Y Y Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Restricted securities Y Y Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
When-issued / delayed-delivery securities Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Investment companies Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Securities of foreign issuers Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Long-term debt Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Short-term debt Y Y Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Sovereign debt (foreign) Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
U.S. Government securities Y Y Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Money market instruments Y Y Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Mortgage-backed securities Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
</TABLE>
6
<PAGE> 58
<TABLE>
<CAPTION>
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Moder- Moder-
Small Mid Inter- ately ately
Cap Cap national Bond Aggre- Aggre- Moder- Conser- Conser-
Index Index Index Index ssive ssive ate vative vative
TYPE OF INVESTMENT OR TECHNIQUE Fund Fund II Fund Fund Fund Fund Fund Fund Fund
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Collateralized mortgage obligations Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Dollar rolls Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Bank obligations Y Y Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Repurchase agreements Y Y Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Futures Y Y Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Options Y Y Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Foreign currencies Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Forward currency contracts Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Borrowing money Y Y Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Lending of portfolio securities Y Y Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Short sales Y Y Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Swap Agreements Y Y Y Y Y Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
Nationwide Contract Y Y Y Y
-------------------------------------------------------- ------ ----- ------ ------ ------ ----- ------ ------ ------
</TABLE>
7
<PAGE> 59
DESCRIPTIONS OF PORTFOLIO INVESTMENTS AND INVESTMENT POLICIES
THE NATIONWIDE CONTRACT
Each of the Investor Destinations Series (except The Aggressive Fund)
will invest in the Nationwide Contract. The Nationwide Contract is a fixed
interest contract issued and guaranteed by Nationwide Life Insurance Company
("Nationwide"). This contract has a stable principal value and will pay each
Fund a fixed rate of interest. The fixed interest rate must be at least 3.50%,
but may be higher. Nationwide will calculate the interest rate in the same way
that it calculates guaranteed interest rates for similar contracts. Because of
the guaranteed nature of the contract, the Funds will not directly participate
in the actual experience of the assets underlying the contract. Although under
certain market conditions a Fund's performance may be hurt by its investment in
the Nationwide Contract, VMF believes that the stable nature of the Nationwide
Contract should reduce a Fund's volatility and overall risk, especially when the
bond and stock markets decline simultaneously.
DEBT OBLIGATIONS
Debt obligations are subject to the risk of an issuer's inability to
meet principal and interest payments on its obligations ("credit risk") and are
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer, and general market
liquidity. Lower-rated securities are more likely to react to developments
affecting these risks than are more highly rated securities, which react
primarily to movements in the general level of interest rates. Although the
fluctuation in the price of debt securities is normally less than that of common
stocks, in the past there have been extended periods of cyclical increases in
interest rates that have caused significant declines in the price of debt
securities in general and have caused the effective maturity of securities with
prepayment features to be extended, thus effectively converting short or
intermediate securities (which tend to be less volatile in price) into long term
securities (which tend to be more volatile in price).
Ratings as Investment Criteria. High-quality, medium-quality and
non-investment grade debt obligations are characterized as such based on their
ratings by nationally recognized statistical rating organizations ("NRSROs"),
such as Standard & Poor's Rating Group ("Standard & Poor's") or Moody's Investor
Services ("Moody's"). In general, the ratings of NRSROs represent the opinions
of these agencies as to the quality of securities that they rate. Such ratings,
however, are relative and subjective, and are not absolute standards of quality
and do not evaluate the market value risk of the securities. These ratings are
used by a Fund as initial criteria for the selection of portfolio securities,
but the Fund also relies upon the independent advice of a Fund's adviser or
subadviser(s) to evaluate potential investments. This is particularly important
for lower-quality securities. Among the factors that will be considered are the
long-term ability of the issuer to pay principal and interest and general
economic trends, as well as an issuer's capital structure, existing debt and
earnings history. The Appendix to this Statement of Additional Information
contains further information about the rating categories of NRSROs and their
significance.
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<PAGE> 60
Subsequent to its purchase by a Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by such Fund. In addition, it is possible that an NRSRO might not change its
rating of a particular issue to reflect subsequent events. None of these events
generally will require sale of such securities, but a Fund's adviser or
subadviser will consider such events in its determination of whether the Fund
should continue to hold the securities. In addition, to the extent that the
ratings change as a result of changes in such organizations or their rating
systems, or due to a corporate reorganization, the Fund will attempt to use
comparable ratings as standards for its investments in accordance with its
investment objective and policies.
Medium-Quality Securities. Certain Funds anticipate investing in
medium-quality obligations, which are obligations rated in the fourth highest
rating category by any NRSRO. Medium-quality securities, although considered
investment-grade, may have some speculative characteristics and may be subject
to greater fluctuations in value than higher-rated securities. In addition, the
issuers of medium-quality securities may be more vulnerable to adverse economic
conditions or changing circumstances than issues of higher-rated securities.
U.S. Government Securities. U.S. government securities are issued
or guaranteed by the U.S. government or its agencies or instrumentalities.
Securities issued by the U.S. government include U.S. Treasury obligations, such
as Treasury bills, notes, and bonds. Securities issued by government agencies or
instrumentalities include obligations of the following:
- - the Federal Housing Administration, Farmers Home Administration, and
the Government National Mortgage Association ("GNMA"), including GNMA
pass-through certificates, whose securities are supported by the full
faith and credit of the United States;
- - the Federal Home Loan Banks whose securities are supported by the
right of the agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality; and
- - the Student Loan Marketing Association and the Federal Home Loan
Mortgage Corporation ("FHLMC"), whose securities are supported only by
the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
Mortgage-Backed Securities. Mortgage-backed securities represent direct
or indirect participation in, or are secured by and payable from, mortgage loans
secured by real property, and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Such securities may be
issued or guaranteed by U.S. Government agencies or instrumentalities by private
issuers, generally originators in mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks, investment bankers, and
special purpose entities (collectively, "private lenders"). The purchase of
mortgage-backed securities from private lenders may entail greater risk than
mortgage-backed securities that are issued or guaranteed by the U.S. government,
its agencies
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<PAGE> 61
or instrumentalities. Mortgage-backed securities issued by private lenders maybe
supported by pools of mortgage loans or other mortgage-backed securities that
are guaranteed, directly or indirectly, by the U.S. Government or one of its
agencies or instrumentalities, or they may be issued without any governmental
guarantee of the underlying mortgage assets but with some form of
non-governmental credit enhancement. These credit enhancements may include
letters of credit, reserve funds, overcollateralization, or guarantees by third
parties.
Since privately-issued mortgage certificates are not guaranteed by an
entity having the credit status of GNMA or FHLMC, such securities generally are
structured with one or more types of credit enhancement. Such credit enhancement
falls into two categories: (i) liquidity protection; and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provisions of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.
The ratings of mortgage-backed securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency loss
experience on the underlying pool of assets is better than expected. There can
be no assurance that the private issuers or credit enhancers of mortgage-backed
securities can meet their obligations under the relevant policies or other forms
of credit enhancement.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments sometimes funded from a
portion of the payments on the underlying assets are held in reserve against
future losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such security.
Private lenders or government-related entities may also create mortgage
loan pools offering pass-through investments where the mortgages underlying
these securities may be alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may be shorter than was previously customary. As new types of
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<PAGE> 62
mortgage-related securities are developed and offered to investors, a Fund,
consistent with its investment objective and policies, may consider making
investments in such new types of securities.
The yield characteristics of mortgage-backed securities differ from
those of traditional debt obligations. Among the principal differences are that
interest and principal payments are made more frequently on mortgage-backed
securities, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans or other assets generally may be prepaid
at any time. As a result, if a Fund purchases these securities at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is lower than expected will have the opposite
effect of increasing the yield to maturity. Conversely, if a Fund purchases
these securities at a discount, a prepayment rate that is faster than expected
will increase yield to maturity, while a prepayment rate that is slower than
expected will reduce yield to maturity. Accelerated prepayments on securities
purchased by the Fund at a premium also impose a risk of loss of principal
because the premium may not have been fully amortized at the time the principal
is prepaid in full.
Unlike fixed rate mortgage-backed securities, adjustable rate
mortgage-backed securities are collateralized by or represent interest in
mortgage loans with variable rates of interest. These variable rates of interest
reset periodically to align themselves with market rates. A Fund will not
benefit from increases in interest rates to the extent that interest rates rise
to the point where they cause the current coupon of the underlying adjustable
rate mortgages to exceed any maximum allowable annual or lifetime reset limits
(or "cap rates") for a particular mortgage. In this event, the value of the
adjustable rate mortgage-backed securities in a Fund would likely decrease.
Also, a Fund's net asset value could vary to the extent that current yields on
adjustable rate mortgage-backed securities are different than market yields
during interim periods between coupon reset dates or if the timing of changes to
the index upon which the rate for the underlying mortgage is based lags behind
changes in market rates. During periods of declining interest rates, income to a
Fund derived from adjustable rate mortgage securities which remain in a mortgage
pool will decrease in contrast to the income on fixed rate mortgage securities,
which will remain constant. Adjustable rate mortgages also have less potential
for appreciation in value as interest rates decline than do fixed rate
investments.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA certificates also are supported by the authority of GNMA to borrow
funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-backed securities issued by FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States. Fannie Maes are guaranteed as to timely payment of
the principal and interest by FNMA. Mortgage-backed securities issued by the
Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). The FHLMC is
a corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks and do not
11
<PAGE> 63
constitute a debt or obligation of the United States or by any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or
timely payment of all principal payments on the underlying mortgage loans. When
the FHLMC does not guarantee timely payment of principal, FHLMC may remit the
amount due on account of its guarantee of ultimate payment of principal at any
time after default on an underlying mortgage, but in no event later than one
year after it becomes payable.
Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
Fannie Mae or Freddie Mae Certificates, but also may be collateralized by whole
loans or private pass-throughs (such collateral collectively hereinafter
referred to as "Mortgage Assets"). Multiclass pass-through securities are
interests in a trust composed of Mortgage Assets. Unless the context indicates
otherwise, all references herein to CMOs include multiclass pass-through
securities. Payments of principal and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distributions on the multiclass pass-through securities. CMOs
may be issued by agencies or instrumentalities of the U.S. government, or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specified fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a series of a CMO
in innumerable ways. In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of CMOs until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. As market conditions change, and particularly during
periods of rapid or unanticipated changes in market interest rates, the
attractiveness of the CMO classes and the ability of the structure to provide
the anticipated investment characteristics may be significantly reduced. Such
changes can result in volatility in the market value, and in some instances
reduced liquidity, of the CMO class.
A Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or a final distribution
date but may be retired earlier. PAC Bonds are a type of CMO tranche or series
designed to provide relatively predictable payments of principal provided that,
among other things, the actual prepayment experience on the underlying mortgage
loans falls within a predefined range. If the actual
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<PAGE> 64
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the predefined range or if deviations from other assumptions occur,
principal payments on the PAC Bond may be earlier or later than predicted. The
magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage-backed securities.
MONEY MARKET INSTRUMENTS
Generally, Fund Asset Management will employ futures and options on
futures to provide liquidity necessary to meet anticipated redemptions or for
day-to-day operating purposes of the Index Funds. However, if considered
appropriate in the opinion of Fund Asset Management, a portion of an Index
Fund's assets may be invested in certain types of money market instruments with
remaining maturities of 397 days or less for liquidity purposes.
Money market instruments may include the following types of
instruments:
-- obligations issued or guaranteed as to interest and principal by
the U.S. Government, its agencies, or instrumentalities, or any
federally chartered corporation, with remaining maturities of 397
days or less;
-- repurchase agreements;
-- certificates of deposit, time deposits and bankers' acceptances
issued by domestic banks (including their branches located outside the
United States (Eurodollars) and subsidiaries located in Canada),
domestic branches of foreign banks (Yankee dollars), savings and loan
associations and similar institutions, and such obligations issued by
foreign branches of foreign banks and financial institutions;
-- commercial paper (including asset-backed commercial paper), which
are short-term unsecured promissory notes issued by corporations in
order to finance their current operations. Generally the commercial
paper will be rated within the top two rating categories by an NRSRO,
or if not rated, is issued and guaranteed as to payment of principal
and interest by companies which at the date of investment have a high
quality outstanding debt issue;
-- high quality short-term (maturity in 397 days or less) corporate
obligations, these obligations will be rated within the top two rating
categories by an NRSRO or if not rated, of comparable quality.
REPURCHASE AGREEMENTS
In connection with the purchase of a repurchase agreement from member
banks of the Federal Reserve System or certain non-bank dealers by a Fund, the
Fund's custodian, or a subcustodian, will have custody of, and will hold in a
segregated account, securities acquired by the
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<PAGE> 65
Fund under a repurchase agreement. Repurchase agreements are contracts under
which the buyer of a security simultaneously commits to resell the security to
the seller at an agreed-upon price and date. Repurchase agreements are
considered by the staff of the Securities and Exchange Commission (the "SEC") to
be loans by the Fund. Repurchase agreements may be entered into with respect to
securities of the type in which it may invest or government securities
regardless of their remaining maturities, and will require that additional
securities be deposited with it if the value of the securities purchased should
decrease below resale price. Repurchase agreements involve certain risks in the
event of default or insolvency by the other party, including possible delays or
restrictions upon a Fund's ability to dispose of the underlying securities, the
risk of a possible decline in the value of the underlying securities during the
period in which a Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the repurchase agreement. A Fund's adviser or
subadviser, acting under the supervision of the Board of Trustees, reviews the
creditworthiness of those banks and non-bank dealers with which the Funds enter
into repurchase agreements to evaluate these risks.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS
When securities are purchased on a "when-issued" basis or purchased for
delayed delivery, then payment and delivery occur beyond the normal settlement
date at a stated price and yield. When-issued transactions normally settle
within 45 days. The payment obligation and the interest rate that will be
received on when-issued securities are fixed at the time the buyer enters into
the commitment. Due to fluctuations in the value of securities purchased or sold
on a when-issued or delayed-delivery basis, the yields obtained on such
securities may be higher or lower than the yields available in the market on the
dates when the investments are actually delivered to the buyers. The greater a
Fund's outstanding commitments for these securities, the greater the exposure to
potential fluctuations in the net asset value of a Fund. Purchasing when-issued
or delayed-delivery securities may involve the additional risk that the yield or
market price available in the market when the delivery occurs may be higher or
the market price lower than that obtained at the time of commitment.
When a Fund agrees to purchase when-issued or delayed-delivery
securities, to the extent required by the SEC, its custodian will set aside
permissible liquid assets equal to the amount of the commitment in a segregated
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case a Fund may be required subsequently to
place additional assets in the segregated account in order to ensure that the
value of the account remains equal to the amount of such Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. In addition, because the Fund will set aside cash or
liquid portfolio securities to satisfy its purchase commitments in the manner
described above, such Fund's liquidity and the ability of the adviser or
subadviser to manage it might be affected in the event its commitments to
purchase "when-issued" securities ever exceed 25% of the value of its total
assets. Under normal market conditions, however, a Fund's commitment to purchase
"when-issued" or "delayed-delivery" securities will not exceed 25% of the value
of its total assets. When the Fund engages in when-issued or delayed-delivery
transactions, it relies on the other party to consummate
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<PAGE> 66
the trade. Failure of the seller to do so may result in a Fund incurring a loss
or missing an opportunity to obtain a price considered to be advantageous.
15
<PAGE> 67
STANDBY COMMITMENT AGREEMENTS
The Bond Index Fund may enter into standby commitment agreements. These
agreements commit the Bond Index Fund, for a stated period of time, to purchase
a stated amount of fixed income securities that may be issued and sold to the
Fund at the option of the issuer. The price and coupon of the security is fixed
at the time of the commitment. At the time of entering into the agreement the
Bond Index Fund is paid a commitment fee, regardless of whether or not the
security is ultimately issued. The Bond Index Fund will enter into such
agreements for the purpose of investing in the security underlying the
commitment at a yield and price that is considered advantageous to the Fund. The
Bond Index Fund will not enter into a standby commitment with a remaining term
in excess of 90 days and will limit its investment in such commitments so that
the aggregate purchase price of securities subject to such commitments, together
with the value of all other illiquid securities, will not exceed 15% of its net
assets taken at the time of the commitment. The Bond Index Fund will maintain a
segregated account with its custodian of cash, cash equivalents, U.S. Government
securities or other liquid securities in an aggregate amount equal to the
purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Bond
Index Fund may bear the risk of a decline in the value of such security and may
not benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment agreement
and the related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued, and the value of the security
will thereafter be reflected in the calculation of the Bond Index Fund's net
asset value. The cost basis of the security will be adjusted by the amount of
the commitment fee. In the event the security is not issued, the commitment fee
will be recorded as income on the expiration date of the standby commitment.
INDEXED SECURITIES
The Index Funds may invest in securities the potential return of which
is based on the change in particular measurements of value or rate (an "index").
As an illustration, a Fund may invest in a debt security that pays interest and
returns principal based on the change in the value of a securities index or a
basket of securities. If a Series invests in such securities, it may be subject
to reduced or eliminated interest payments or loss of principal in the event of
an adverse movement in the relevant index.
LENDING PORTFOLIO SECURITIES
A Fund may lend its portfolio securities to brokers, dealers and other
financial institutions, provided it receives cash collateral which at all times
is maintained in an amount equal to at least 100% of the current market value of
the securities loaned. By lending its portfolio securities, the Fund can
increase its income through the investment of the cash collateral. For the
purposes of this
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policy, the Fund considers collateral consisting of cash, U.S. Government
securities or letters of credit issued by banks whose securities meet the
standards for investment by the Fund to be the equivalent of cash. From time to
time, the Fund may return to the borrower or a third party which is unaffiliated
with it, and which is acting as a "placing broker," a part of the interest
earned from the investment of collateral received for securities loaned.
The SEC currently requires that the following conditions must be met
whenever portfolio securities are loaned: (1) a Fund must receive at least 100%
cash collateral of the type discussed in the preceding paragraph from the
borrower; (2) the borrower must increase such collateral whenever the market
value of the securities loaned rises above the level of such collateral; (3) a
Fund must be able to terminate the loan at any time; (4) a Fund must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions payable on the loaned securities, and any increase in market
value; (5) a Fund may pay only reasonable custodian fees in connection with the
loan; and (6) while any voting rights on the loaned securities may pass to the
borrower, a Fund's board of trustees must be able to terminate the loan and
regain the right to vote the securities if a material event adversely affecting
the investment occurs. These conditions may be subject to future modification.
Loan agreements involve certain risks in the event of default or insolvency of
the other party including possible delays or restrictions upon the Fund's
ability to recover the loaned securities or dispose of the collateral for the
loan.
SMALL COMPANY STOCKS
Investing in securities of small-sized companies may involve greater
risks than investing in the stocks of larger, more established companies since
these securities may have limited marketability and thus may be more volatile
than securities of larger, more established companies or the market averages in
general. Because small-sized companies normally have fewer shares outstanding
than larger companies, it may be more difficult for a Fund to buy or sell
significant numbers of such shares without an unfavorable impact on prevailing
prices. Small-sized companies may have limited product lines, markets or
financial resources and may lack management depth. In addition, small-sized
companies are typically subject to wider variations in earnings and business
prospects than are larger, more established companies. There is typically less
publicly available information concerning small-sized companies than for larger,
more established ones.
SPECIAL SITUATION COMPANIES
"Special situation companies" include those involved in an actual or
prospective acquisition or consolidation; reorganization; recapitalization;
merger, liquidation or distribution of cash, securities or other assets; a
tender or exchange offer; a breakup or workout of a holding company; or
litigation which, if resolved favorably, would improve the value of the
company's stock. If the actual or prospective situation does not materialize as
anticipated, the market price of the securities of a "special situation company"
may decline significantly. Therefore, an investment in a Fund that invests a
significant portion of its assets in these securities may involve a greater
degree of risk than an investment in other mutual funds that seek long-term
growth of capital by investing in better-known, larger companies. The
subadvisers of such Funds believe, however, that if a subadviser analyzes
"special situation companies" carefully and invests in the securities of these
companies at
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the appropriate time, the Fund may achieve capital growth. There can be no
assurance however, that a special situation that exists at the time the Fund
makes its investment will be consummated under the terms and within the time
period contemplated, if it is consummated at all.
FOREIGN SECURITIES
Investing in foreign securities (including through the use of
depository receipts) involves certain special considerations which are not
typically associated with investing in United States securities. Since
investments in foreign companies will frequently involve currencies of foreign
countries, and since a Fund may hold securities and funds in foreign currencies,
a Fund may be affected favorably or unfavorably by changes in currency rates and
in exchange control regulations, if any, and may incur costs in connection with
conversions between various currencies. Most foreign stock markets, while
growing in volume of trading activity, have less volume than the New York Stock
Exchange, and securities of some foreign companies are less liquid and more
volatile than securities of comparable domestic companies. Similarly, volume and
liquidity in most foreign bond markets are less than in the United States and,
at times, volatility of price can be greater than in the United States. Fixed
commissions on foreign securities exchanges are generally higher than negotiated
commissions on United States exchanges, although each Fund endeavors to achieve
the most favorable net results on its portfolio transactions. There is generally
less government supervision and regulation of securities exchanges, brokers and
listed companies in foreign countries than in the United States. In addition,
with respect to certain foreign countries, there is the possibility of exchange
control restrictions, expropriation or confiscatory taxation, and political,
economic or social instability, which could affect investments in those
countries. Foreign securities, such as those purchased by a Fund, may be subject
to foreign government taxes, higher custodian fees, higher brokerage costs and
dividend collection fees which could reduce the yield on such securities.
Foreign economies may differ favorably or unfavorably from the U.S.
economy in various respects, including growth of gross domestic product, rates
of inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities are
less liquid and their prices more volatile than comparable U.S. securities. From
time to time, foreign securities may be difficult to liquidate rapidly without
adverse price effects.
[Depository Receipts. A Fund may invest in foreign securities by
purchasing depository receipts, including American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs") or
other securities convertible into securities of issuers based in foreign
countries. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. Generally, ADRs, in
registered form, are denominated in U.S. dollars and are designed for use in the
U.S. securities markets, GDRs, in bearer form, are issued and designed for use
outside the United States and EDRs (also referred to as Continental Depository
Receipts ("CDRs")), in bearer form, may be denominated in other currencies and
are designed for use in European securities markets. ADRs are receipts typically
issued by a U.S. Bank or trust company evidencing ownership of the underlying
securities. EDRs are European receipts evidencing a similar arrangement. GDRs
are receipts typically issued by non-United States banks and trust companies
that evidence ownership of either foreign or domestic
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securities. For purposes of a Fund's investment policies, ADRs, GDRs and EDRs
are deemed to have the same classification as the underlying securities they
represent. Thus, an ADR, GDR or EDR representing ownership of common stock will
be treated as common stock.
A Fund may invest in depository receipts through "sponsored" or
"unsponsored" facilities. While ADRs issued under these two types of facilities
are in some respects similar, there are distinctions between them relating to
the rights and obligations of ADR holders and the practices of market
participants.
A depository may establish an unsponsored facility without
participation by (or even necessarily the acquiescence of) the issuer of the
deposited securities, although typically the depository requests a letter of
non-objection from such issuer prior to the establishment of the facility.
Holders of unsponsored ADRs generally bear all the costs of such facilities. The
depository usually charges fees upon the deposit and withdrawal of the deposited
securities, the conversion of dividends into U.S. dollars, the disposition of
non-cash distributions, and the performance of other services. The depository of
an unsponsored facility frequently is under no obligation to pass through voting
rights to ADR holders in respect of the deposited securities. In addition, an
unsponsored facility is generally not obligated to distribute communications
received from the issuer of the deposited securities or to disclose material
information about such issuer in the U.S. and thus there may not be a
correlation between such information and the market value of the depository
receipts. Unsponsored ADRs tend to be less liquid than sponsored ADRs.
Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depository. The deposit agreement sets
out the rights and responsibilities of the issuer, the depository, and the ADR
holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as dividend
payment fees of the depository), although ADR holders continue to bear certain
other costs (such as deposit and withdrawal fees). Under the terms of most
sponsored arrangements, depositories agree to distribute notices of shareholder
meetings and voting instructions, and to provide shareholder communications and
other information to the ADR holders at the request of the issuer of the
deposited securities.]
Eurodollar and Yankee Obligations. Eurodollar bank obligations are
dollar-denominated certificates of deposit and time deposits issued outside the
U.S. capital markets by foreign branches of U.S. banks and by foreign banks.
Yankee bank obligations are dollar-denominated obligations issued in the U.S.
capital markets by foreign banks.
Eurodollar and Yankee bank obligations are subject to the same risks
that pertain to domestic issues, notably credit risk, market risk and liquidity
risk. Additionally, Eurodollar (and to a limited extent, Yankee) bank
obligations are subject to certain sovereign risks. One such risk is the
possibility that a sovereign country might prevent capital, in the form of
dollars, from flowing across their borders. Other risks include: adverse
political and economic developments; the extent and quality of government
regulation of financial markets and institutions; the imposition of foreign
withholding taxes, and the expropriation or nationalization of foreign issues.
However, Eurodollar and Yankee bank obligations held in a Fund will undergo the
same credit analysis as domestic issues
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in which the Fund invests, and will have at least the same financial strength as
the domestic issuers approved for the Fund.
Foreign Sovereign Debt. Certain Funds may invest in sovereign debt
obligations issued by foreign governments. To the extent that a Fund invests in
obligations issued by developing or emerging markets, these investments involve
additional risks. Sovereign obligors in developing and emerging market countries
are among the world's largest debtors to commercial banks, other governments,
international financial organizations and other financial institutions. These
obligors have in the past experienced substantial difficulties in servicing
their external debt obligations, which led to defaults on certain obligations
and the restructuring of certain indebtedness. Restructuring arrangements have
included, among other things, reducing and rescheduling interest and principal
payments by negotiation new or amended credit agreements or converting
outstanding principal and unpaid interest to Brady Bonds, and obtaining new
credit for finance interest payments. Holders of certain foreign sovereign debt
securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the foreign sovereign debt securities in which a Fund may invest
will not be subject to similar restructuring arrangements or to requests for new
credit which may adversely affect the Fund's holdings. Furthermore, certain
participants in the secondary market for such debt may be directly involved in
negotiating the terms of these arrangements and may therefore have access to
information not available to other market participants.
SHORT SELLING OF SECURITIES
In a short sale of securities, a Fund sells stock which it does not
own, making delivery with securities "borrowed" from a broker. The Fund is then
obligated to replace the security borrowed by purchasing it at the market price
at the time of replacement. This price may or may not be less than the price at
which the security was sold by the Fund. Until the security is replaced, the
Fund is required to pay the lender any dividends or interest which accrue during
the period of the loan. In order to borrow the security, the Fund may also have
to pay a fee which would increase the cost of the security sold. The proceeds of
the short sale will be retained by the broker, to the extent necessary to meet
margin requirements, until the short position is closed out.
Such transactions will be used only in an effort to adjust the
weightings of particular securities represented in the basket to reflect such
securities' weightings in the target index. Fund Asset Management will not
employ short sales in reflection of Fund Asset Management's outlook for the
securities markets or for the performance of the securities sold short.
A Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. A Fund will realize a gain if the
security declines in price between those two dates. The amount of any gain will
be decreased and the amount of any loss will be increased by any interest the
Fund may be required to pay in connection with the short sale.
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. A Fund must deposit in a segregated
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account an amount of cash or liquid assets equal to the difference between (a)
the market value of securities sold short at the time that they were sold short
and (b) the value of the collateral deposited with the broker in connection with
the short sale (not including the proceeds from the short sale). While the short
position is open, the Fund must maintain on a daily basis the segregated account
at such a level that (1) the amount deposited in it plus the amount deposited
with the broker as collateral equals the current market value of the securities
sold short and (2) the amount deposited in it plus the amount deposited with the
broker as collateral is not less than the market value of the securities at the
time they were sold short.
A Fund may engage in short sales if at the time of the short sale the
Fund owns or has the right to obtain without additional cost an equal amount of
the security being sold short. This investment technique is known as a short
sale "against the box." There will be certain additional transaction costs
associated with short sales against the box, but the Fund will endeavor to
offset these costs with the income from the investment of the cash proceeds of
short sales.
RESTRICTED, NON-PUBLICLY TRADED AND ILLIQUID SECURITIES
A Fund may not invest more than 15% of its net assets, in the
aggregate, in illiquid securities, including repurchase agreements which have a
maturity of longer than seven days, time deposits maturing in more than seven
days and securities that are illiquid because of the absence of a readily
available market or legal or contractual restrictions on resale. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Unless subsequently registered for sale, these securities can
only be sold in privately negotiated transactions or pursuant to an exemption
from registration. Investment companies do not typically hold a significant
amount of these restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on resale may
have an adverse effect on the marketability of portfolio securities, and an
investment company might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. An investment company might
also have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
[In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal
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restrictions on resale to the general public or to certain institutions may not
be indicative of the liquidity of such investments.
The SEC has adopted Rule 144A which allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers.
Any such restricted securities will be considered to be illiquid for
purposes of a Fund's limitations on investments in illiquid securities unless,
pursuant to procedures adopted by the Board of Trustees of the Trust, the
adviser or the subadviser has determined such securities to be liquid because
such securities are eligible for resale pursuant to Rule 144A and are readily
saleable. To the extent that qualified institutional buyers may become
uninterested in purchasing Rule 144A securities, the Fund's level of illiquidity
may increase.]
Some Funds may sell over-the-counter ("OTC") options and, in connection
therewith, segregate assets or cover its obligations with respect to OTC options
written by the Fund. The assets used as cover for OTC options written by a Fund
will be considered illiquid unless the OTC options are sold to qualified dealers
who agree that the Fund may repurchase any OTC option it writes at a maximum
price to be calculated by a formula set forth in the option agreement. The cover
for an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
The applicable subadviser or adviser will monitor the liquidity of
restricted securities in the portion of a Fund it manages. In reaching liquidity
decisions, the following factors are considered: (A) the unregistered nature of
the security; (B) the frequency of trades and quotes for the security; (C) the
number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (D) dealer undertakings to make a market in the
security and (E) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer).
Private Placement Commercial Paper. Commercial paper eligible for
resale under Section 4(2) of the Securities Act is offered only to accredited
investors. Rule 506 of Regulation D in the Securities Act of 1933 lists
investment companies as an accredited investor.
Section 4(2) paper not eligible for resale under Rule 144A under the
Securities Act shall be deemed liquid if (1) the Section 4(2) paper is not
traded flat or in default as to principal and interest; (2) the Section 4(2)
paper is rated in one of the two highest rating categories by at least two
NRSROs, or if only NRSRO rates the security, it is rated in one of the two
highest categories by that NRSRO; and (3) the Adviser believes that, based on
the trading markets for such security, such security can be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Fund has valued the security.
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BORROWING
A Fund may borrow money from banks, limited by each Fund's fundamental
investment restriction to 33-1/3% of its total assets (including the amount
borrowed), and may engage in mortgage dollar roll and reverse repurchase
agreements which may be considered a form of borrowing. In addition, a Fund may
borrow up to an additional 5% of its total assets from banks for temporary or
emergency purposes. A Fund will not purchase securities when bank borrowings
exceed 5% of such Fund's total assets.
Each Fund expects that its borrowings will be on a secured basis. In
such situations, either the custodian will segregate the pledged assets for the
benefit of the lender or arrangements will be made with a suitable subcustodian,
which may include the lender. The Funds have established a line-of-credit
("LOC") with their custodian by which they may borrow for temporary or emergency
purposes. The Funds intend to use the LOC to meet large or unexpected
redemptions that would otherwise force a Fund to liquidate securities under
circumstances which are unfavorable to a Fund's remaining shareholders.
Leverage and the Index Funds. The use of leverage by an Index Fund
creates an opportunity for greater total return, but, at the same time, creates
special risks. For example, leveraging may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund's portfolio. Although the
principal of such borrowings will be fixed, a Fund's assets may change in value
during the time the borrowings are outstanding. Borrowings will create interest
expenses for the Fund which can exceed the income from the assets purchased with
the borrowings. To the extent the income or capital appreciation derived from
securities purchased with borrowed funds exceeds the interest a Fund will have
to pay on the borrowings, the Fund's return will be greater than if leverage had
not been used. Conversely, if the income or capital appreciation from the
securities purchased with such borrowed funds is not sufficient to cover the
cost of borrowing, the return to a Fund will be less than if leverage had not
been used, and therefore the amount available for distribution to shareholders
as dividends and other distributions will be reduced. In the latter case, Fund
Asset Management in its best judgment nevertheless may determine to maintain a
Fund's leveraged position if it expects that the benefits to the Fund's
shareholders of maintaining the leveraged position will outweigh the current
reduced return.
Certain types of borrowings by a Fund may result in the Fund being
subject to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede Fund Asset Management from managing a
Fund's portfolio in accordance with the Fund's investment objectives and
policies. However, a breach of any such covenants not cured within the specified
cure period may result in acceleration of outstanding indebtedness and require a
Fund to dispose of portfolio investments at a time when it may be
disadvantageous to do so.
A Fund at times may borrow from affiliates of Fund Asset Management,
provided that the terms of such borrowings are no less favorable than those
available from comparable sources of funds in the marketplace.
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DERIVATIVE INSTRUMENTS
A Fund's adviser or subadviser may use a variety of derivative
instruments, including options, futures contracts (sometimes referred to as
"futures"), options on futures contracts, stock index options, and forward
currency contracts to provide liquidity or to act as a proxy for a direct
investment in securities underlying a Fund's index. Derivative instruments are
securities or agreements whose value is based on the value of some underlying
asset (e.g., a security, currency or index) or the level of a reference index.
Derivatives generally have investment characteristics that are based
upon either forward contracts (under which one party is obligated to buy and the
other party is obligated to sell an underlying asset at a specific price on a
specified date) or option contracts (under which the holder of the option has
the right but not the obligation to buy or sell an underlying asset at a
specified price on or before a specified date). Consequently, the change in
value of a forward-based derivative generally is roughly proportional to the
change in value of the underlying asset. In contrast, the buyer of an
option-based derivative generally will benefit from favorable movements in the
price of the underlying asset but is not exposed to the corresponding losses
that result from adverse movements in the value of the underlying asset. The
seller (writer) of an option-based derivative generally will receive fees or
premiums but generally is exposed to losses resulting from changes in the value
of the underlying asset. Derivative transactions may include elements of
leverage and, accordingly, the fluctuation of the value of the derivative
transaction in relation to the underlying asset may be magnified.
The use of these instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they may be
traded, and the Commodity Futures Trading Commission ("CFTC"). In addition, a
Fund's ability to use these instruments will be limited by tax considerations.
Special Risks Of Derivative Instruments. The use of derivative
instruments involves special considerations and risks as described below. Risks
pertaining to particular instruments are described in the sections that follow.
(1) Successful use of most of these instruments depends upon a Fund's
adviser's or subadviser's ability to predict movements of the overall securities
and currency markets, which requires different skills than predicting changes in
the prices of individual securities. There can be no assurance that any
particular strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of an instrument and price movements of investments
being hedged. For example, if the value of an instrument used in a short hedge
(such as writing a call option, buying a put option, or selling a futures
contract) increased by less than the decline in value of the hedged investment,
the hedge would not be fully successful. Such a lack of correlation might occur
due to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which these instruments are
traded. The effectiveness of hedges using instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in
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the investments being hedged, as well as, how similar the index is to the
portion of the Fund's assets being hedged in terms of securities composition.
(3) Hedging strategies, if successful, can reduce the risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short
hedge because a Fund's adviser or subadviser projected a decline in the price of
a security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the instrument. Moreover, if the price of the instrument
declined by more than the increase in the price of the security, a Fund could
suffer a loss.
(4) As described below, a Fund might be required to maintain assets as
"cover," maintain segregated accounts, or make margin payments when it takes
positions in these instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If the Fund were unable to close out
its positions in such instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position expired or
matured. The requirements might impair the Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise be favorable to
do so, or require that the Fund sell a portfolio security at a disadvantageous
time. The Fund's ability to close out a position in an instrument prior to
expiration or maturity depends on the existence of a liquid secondary market or,
in the absence of such a market, the ability and willingness of the other party
to the transaction ("counter party") to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to the Fund.
For a discussion of the federal income tax treatment of a Fund's
derivative instruments, see ADDITIONAL GENERAL TAX INFORMATION below.
Purchasing Options. Each Index Fund is authorized to purchase put
options on securities held in its portfolio or securities indices the
performance of which is substantially correlated with securities held in its
portfolio. When a Fund purchases a put option, in consideration for an upfront
payment (the "option premium") the Fund acquires a right to sell to another
party specified securities owned by the Fund at a specified price (the "exercise
price") on or before a specified date (the "expiration date"), in the case of an
option on securities, or to receive from another party a payment based on the
amount a specified securities index declines below a specified level on or
before the expiration date, in the case of an option on a securities index. The
purchase of a put option limits the Fund's risk of loss in the event of a
decline in the market value of the portfolio holdings underlying the put option
prior to the option's expiration date. If the market value of the portfolio
holdings associated with the put option increases rather than decreases,
however, the Fund will lose the option premium and will consequently realize a
lower return on the portfolio holdings than would have been realized without the
purchase of the put.
Each Index Fund is also authorized to purchase call options on
securities it intends to purchase or securities indices. When a Fund purchases a
call option, in consideration for the option premium the Fund acquires the right
to purchase from another party specified securities at the
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exercise price on or before the expiration date, in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index increases beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a call option may protect the Fund from having to pay more for a security as a
consequence of increases in the market value for the security during a period
when the Fund is contemplating its purchase, in the case of an option on a
security, or attempting to maintain exposure to an index prior to purchasing the
underlying securities, in the case of an option on an index (an "anticipatory
hedge"). In the event a Fund determines not to purchase a security underlying a
call option, however, the Fund may lose the entire option premium.
Each Index Fund is also authorized to purchase put or call options in
connection with closing out put or call options it has previously sold.
Writing Options. Each Index Fund is authorized to write (i.e., sell)
call options on securities held in its portfolio or securities indices, the
performance of which is substantially correlated to securities held in its
portfolio. When a Fund writes a call option, in return for an option premium the
Fund gives another party the right to buy specified securities owned by the Fund
at the exercise price on or before the expiration date, in the case of an option
on securities, or agrees to pay to another party an amount based on any gain in
a specified securities index beyond a specified level on or before the
expiration date, in the case of an option on a securities index. In the event
the party to which a Fund has written an option fails to exercise its rights
under the option because the value of the underlying securities is less than the
exercise price, the Fund will partially offset any decline in the value of the
underlying securities through the receipt of the option premium. By writing a
call option, however, a Fund limits its ability to sell the underlying
securities, and gives up the opportunity to profit from any increase in the
value of the underlying securities beyond the exercise price, while the option
remains outstanding.
Each Index Fund may also write put options on securities or securities
indices. When a Fund writes a put option, in return for an option premium the
Fund gives another party the right to sell to the Fund a specified security at
the exercise price on or before the expiration date, in the case of an option on
a security, or agrees to pay to another party an amount based on any decline in
a specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. In the event the party to
which the Fund has written an option fails to exercise its rights under the
option because the value of the underlying securities is greater than the
exercise price, the Fund will profit by the amount of the option premium. By
writing a put option, however, a Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of the
security at the time of exercise as long as the put option is outstanding, in
the case of an option on a security, or make a cash payment reflecting any
decline in the index, in the case of an option on an index. Accordingly, when
the Fund writes a put option it is exposed to a risk of loss in the event the
value of the underlying securities falls below the exercise price, which loss
potentially may substantially exceed the amount of option premium received by
the Fund for writing the put option. A Fund will write a put option on a
security or a securities index only if the Fund would be willing to purchase the
security at the exercise price for investment purposes (in the case of an option
on a security) or is writing the put in connection with trading strategies
involving combinations of options--for example, the sale and purchase of options
on the same security or index
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but different expiration dates or exercise prices (a technique called a
"spread").
Each Index Fund is also authorized to sell call or put options in
connection with closing out call or put options it has previously purchased.
Other than with respect to closing transactions, an Index Fund will
only write call or put options that are "covered." A put option will be
considered covered if a Fund has segregated assets with respect to such option
in the manner described in "Special Risks of Derivative Instruments" above. A
call option will be considered covered if a Fund owns the securities it would be
required to deliver upon exercise of the option (or, in the case of option on a
securities index, securities which substantially replicate the performance of
such index) or owns a call option, warrant or convertible instrument which is
immediately exercisable for, or convertible into, such security.
The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration of the
option, the relationship of the exercise price to the market price of the
underlying investment, and general market conditions. Options that expire
unexercised have no value. Options used by a Fund may include European-style
options, which can only be exercised at expiration. This is in contrast to
American-style options which can be exercised at any time prior to the
expiration date of the option.
A Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a Fund may terminate
its obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize the profit or
limit the loss on an option position prior to its exercise or expiration.
Types of Options. A Fund may purchase or write both OTC options and
options traded on foreign and U.S. exchanges. Exchange-traded options are issued
by a clearing organization affiliated with the exchange on which the option is
listed that, in effect, guarantees completion of every exchange-traded option
transaction. OTC options are contracts between the Fund and the counterparty
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when the Fund purchases or writes an OTC option, it relies on the counter
party to make or take delivery of the underlying investment upon exercise of the
option. Failure by the counter party to do so would result in the loss of any
premium paid by the fund as well as the loss of any expected benefit of the
transaction.
A Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. However,
there can be no assurance that such a market will exist at any particular time.
Closing transactions can be made for OTC options only by negotiating directly
with the counterparty, or by a transaction in the secondary market if any such
market exists. Although a Fund will enter into OTC options only with
counterparties that are expected to be capable of entering into closing
transactions with a Fund, there is no assurance that such Fund will
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<PAGE> 79
in fact be able to close out an OTC option at a favorable price prior to
expiration. In the event of insolvency of the counter party, a Fund might be
unable to close out an OTC option position at any time prior to its expiration.
If a Fund is unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Fund could cause material losses because the Fund would be unable
to sell the investment used as a cover for the written option until the option
expires or is exercised.
The writing and purchasing of options is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions.
Transactions using OTC options (other than purchased options) expose a
Fund to counter party risk. To the extent required by SEC guidelines, a Fund
will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities, other options, or futures or (2)
cash and liquid obligations with a value sufficient at all times to cover its
potential obligations to the extent not covered as provided in (1) above. A Fund
will also set aside cash and/or appropriate liquid assets in a segregated
custodial account if required to do so by the SEC and CFTC regulations. Assets
used as cover or held in a segregated account cannot be sold while the position
in the corresponding option or futures contract is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
the Fund's assets to segregated accounts as a cover could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Futures Contracts. The Index Funds may enter into futures contracts,
including interest rate, index, and currency futures and purchase and write
(sell) related options.
To the extent required by regulatory authorities, a Fund will only
enter into futures contracts that are traded on U.S. or foreign exchanges or
boards of trade approved by the CFTC and are standardized as to maturity date
and underlying financial instrument. These transactions may be entered into for
"bona fide hedging" purposes as defined in CFTC regulations and other
permissible purposes including increasing return and hedging against changes in
the value of portfolio securities due to anticipated changes in interest rates,
currency values and/or market conditions. The ability of a Fund to trade in
futures contracts may be limited by the requirements of the Code applicable to a
regulated investment company.
A Fund will not enter into futures contracts and related options for
other than "bona fide hedging" purposes for which the aggregate initial margin
and premiums required to establish positions exceed 5% of the Fund's net asset
value after taking into account unrealized profits and unrealized losses on any
such contracts it has entered into. There is no overall limit on the percentage
of a Fund's assets that may be at risk with respect to futures activities.
Although techniques other than sales and purchases of futures contracts could be
used to reduce a Fund's
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exposure to market, currency, or interest rate fluctuations, such Fund may be
able to hedge its exposure more effectively and perhaps at a lower cost through
using futures contracts.
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., debt security) or currency for a specified price at a
designated date, time, and place. An index futures contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified multiplier times the difference between the value of
the index at the close of the last trading day of the contract and the price at
which the index futures contract was originally written. Transactions costs are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. A futures contract may be satisfied by delivery or purchase, as the
case may be, of the instrument, the currency, or by payment of the change in the
cash value of the index. More commonly, futures contracts are closed out prior
to delivery by entering into an offsetting transaction in a matching futures
contract. Although the value of an index might be a function of the value of
certain specified securities, no physical delivery of those securities is made.
If the offsetting purchase price is less than the original sale price, a Fund
realizes a gain; if it is more, a Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, a Fund realizes
a gain; if it is less, a Fund realizes a loss. The transaction costs must also
be included in these calculations. There can be no assurance, however, that a
Fund will be able to enter into an offsetting transaction with respect to a
particular futures contract at a particular time. If a Fund is not able to enter
into an offsetting transaction, that Fund will continue to be required to
maintain the margin deposits on the futures contract.
No price is paid by a Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, the Fund is required to deposit
in a segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash,
U.S. Government securities or other liquid obligations, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call or put option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to a Fund at
the termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call or put option thereon, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If a Fund has insufficient cash to meet daily variation
margin requirements, it might need to sell securities at a time when such sales
are disadvantageous. Purchasers and sellers of futures positions and options on
futures can enter into
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offsetting closing transactions by selling or purchasing, respectively, an
instrument identical to the instrument held or written. Positions in futures and
options on futures may be closed only on an exchange or board of trade on which
they were entered into (or through a linked exchange). Although the Funds intend
to enter into futures transactions only on exchanges or boards of trade where
there appears to be an active market, there can be no assurance that such a
market will exist for a particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses, because it would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or options on futures
contracts might not correlate perfectly with movements in the prices of the
investments being hedged. For example, all participants in the futures and
options on futures contracts markets are subject to daily variation margin calls
and might be compelled to liquidate futures or options on futures contracts
positions whose prices are moving unfavorably to avoid being subject to further
calls. These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures markets are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the future
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
Swap Agreements. Each Index Fund may enter into equity swap agreements
for any lawful purpose consistent with such Fund's investment objective, such as
for the purpose of attempting to obtain or preserve a particular desired return
or spread at a lower cost to the Fund than if the Fund had invested directly in
an instrument that yielded that desired return or spread. A Fund also may enter
into swaps in order to protect against an increase in the price of, or the
currency exchange rate applicable to, securities that the Fund anticipates
purchasing at a later date. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
several years. In a standard "swap" transaction, two parties agree to exchange
the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with
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respect to a "notional amount," i.e., the return on or increase in value of a
particular dollar amount invested at a particular "basket" of securities
representing a particular index.
The "notional amount" of the swap agreement is the agreed upon basis
for calculating the obligations that the parties to a swap agreement have agreed
to exchange. Under most swap agreements entered into by a Fund, the obligations
of the parties would be exchanged on a "net basis." Consequently, a Fund's
obligation (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Fund's obligation under a swap agreement will be accrued daily (offset against
amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of cash or liquid assets.
Whether a Fund's use of swap agreements will be successful in
furthering its investment objective will depend, in part, on a Fund's adviser's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counterparty. Certain restrictions imposed on a
Fund by the Internal Revenue Code may limit a Fund's ability to use swap
agreements. The swaps market is largely unregulated.
A Fund will enter swap agreements only with counterparties that a
Fund's adviser reasonably believes are capable of performing under the swap
agreements. If there is a default by the other party to such a transaction, a
Fund will have to rely on its contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the agreements related to
the transaction.
Foreign Currency-Related Derivative Strategies - Special
Considerations. The International Index Fund may use futures on foreign
currencies and forward currency contracts in connection with transactions or
anticipated transactions in securities denominated in foreign currencies.
Specifically, the International Index Fund may purchase or sell a currency to
settle a security transaction or sell a currency in which the Fund has received
or anticipates receiving a dividend or distribution.
A forward currency contract involves an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are entered into in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers.
At or before the maturity of a forward contract, the Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and fully or partially offset its contractual obligation to deliver the
currency by purchasing a second contract. If the Fund retains the portfolio
security and engages in an offsetting transaction, the Fund, at the time of
execution of the offsetting transaction, will incur a gain or a loss to the
extent that movement has occurred in forward contract prices.
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The value of derivative instruments on foreign currencies depends on
the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such hedging
instruments, a Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the derivative instruments until they reopen.
Settlement of derivative transactions involving foreign currencies
might be required to take place within the country issuing the underlying
currency. Thus, the Fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
BANK OBLIGATIONS
Bank obligations that may be purchased by a Fund include certificates
of deposit, banker's acceptances and fixed time deposits. A certificate of
deposit is a short-term negotiable certificate issued by a commercial bank
against funds deposited in the bank and is either interest-bearing or purchased
on a discount basis. A bankers' acceptance is a short-term draft drawn on a
commercial bank by a borrower, usually in connection with an international
commercial transaction. The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Fixed time deposits are obligations of branches of U.S. banks or foreign
banks which are payable at a stated maturity date and bear a fixed rate of
interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party.
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Bank obligations may be general obligations of the parent bank or may
be limited to the issuing branch by the terms of the specific obligations or by
government regulation.
DOLLAR ROLLS
The Bond Index Fund may enter into dollar rolls which are arrangements
in which the Fund would sell securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While the Fund would forego principal and interest paid
on the securities during the roll period, the Fund would be compensated by the
difference between the current sales price and the lower price for the future
purchase as well as by any interest earned on the proceeds of the initial sale.
The Bond Index Fund also could be compensated through the receipt of fee income
equivalent to a lower forward price. At the time the Fund would enter into a
mortgage dollar roll, it would set aside permissible liquid assets in a
segregated account to secure its obligation for the forward commitment to buy
securities. Dollar roll transactions may be considered a borrowing by the Fund.
(See "Borrowing")
Dollar rolls involve the risk that the market value of the securities
subject to the Bond Index Fund's forward purchase commitment may decline below
the price of the securities the Bond Index Fund has sold. In the event the buyer
of the securities files for bankruptcy or becomes insolvent, the Bond Index
Fund's use of the proceeds of the current sale portion of the transaction may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Bond Index Fund's obligation to purchase the
similar securities in the forward transaction. Dollar rolls are speculative
techniques which can be deemed to involve leverage. The Bond Index Fund will
engage in dollar roll transactions to enhance return and not for the purpose of
borrowing. Each dollar roll transaction is accounted for as a sale of a
portfolio security and a subsequent purchase of a substantially similar security
in the forward market.
ADDITIONAL INFORMATION CONCERNING THE INDICES
Russell 2000. The Small Cap Index Fund and the Small Cap Index Series
are not promoted, sponsored or endorsed by, not in any way affiliated with Frank
Russell Company. Frank Russell Company is not responsible for and has not
reviewed the Small Cap Index Fund or the Small Cap Index Series nor any
associated literature or publications and Frank Russell Company makes no
representation or warranty, express or implied, as to their accuracy, or
completeness, or otherwise.
Frank Russell Company reserves the right, at any time and without
notice, to alter, amend, terminate or in any way change the Russell 2000(R)
Index. Frank Russell Company has no obligation to take the needs of any
particular fund or its participants or any other product or person into
consideration in determining, composing or calculating the Index.
Frank Russell Company's publication of the Russell 2000(R) Index in no
way suggests or implies an opinion by Frank Russell Company as to the
attractiveness or appropriateness of investment in any or all securities upon
which the Russell 2000 is based. Frank Russell Company makes no representation,
warranty, or guarantee as to the accuracy, completeness, reliability, or
otherwise of the Russell 2000 or any data included in the Russell 2000. Frank
Russell Company
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<PAGE> 85
makes no representation or warranty regarding the use, or the results of use, of
the Russell 2000 or any data included therein, or any security (or combination
thereof) comprising the Russell 2000. Frank Russell Company makes no other
express or implied warranty, and expressly disclaims any warranty, or any kind,
including, without means of limitation, any warranty of merchantability or
fitness for a particular purpose with respect to the Russell 2000 or any data or
any security (or combination thereof) included therein.
EAFE Index. The EAFE Index is the exclusive property of Morgan
Stanley & Co. Incorporated ("Morgan Stanley"). The EAFE Index is a service mark
of Morgan Stanley Group Inc. and has been licensed for use by the Investment
Adviser and its affiliates.
The International Index Fund and the International Index Series are not
sponsored, endorsed, sold or promoted by Morgan Stanley. Morgan Stanley makes no
representation or warranty, express or implied, to the owners of shares of the
International Index Fund and the International Index Series or any member of the
public regarding the advisability of investing in securities generally or in the
International Index Fund and the International Index Series particularly or the
ability of the EAFE Index to track general stock market performance. Morgan
Stanley is the licensor of certain trademarks, service marks and trade names of
Morgan Stanley and of the EAFE Index. Morgan Stanley has no obligation to take
the needs of the International Index Fund and the International Index Series or
the owners of shares of the International Index Fund and the International Index
Series into consideration in determining, composing or calculating the EAFE
Index. Morgan Stanley is not responsible for and has not participated in the
determination of the timing of, prices at, or quantities of shares of the
International Index Fund and the International index Series to be issued or in
the determination or calculation of the equation by which the shares of the
International Index Fund and the International Index Series is redeemable for
cash. Morgan Stanley has no obligation or liability to owners of shares of the
International Index Fund and the International Index Series in connection with
the administration, marketing or trading of the International Index Fund and the
International Index Series.
Although Morgan Stanley shall obtain information for inclusion in or
for use in the calculation of the EAFE Index from sources which Morgan Stanley
considers reliable, Morgan Stanley does not guarantee the accuracy and/or the
completeness of the EAFE Index or any data included therein. Morgan Stanley
makes no warranty, express or implied, as to results to be obtained by licensee,
licensee's customers and counterparties, owners of shares of the International
Index Fund and the International Index Series, or any other person or entity
from the use of the EAFE Index or any data included therein in connection with
the rights licensed hereunder or for any other use. Morgan Stanley makes no
express or implied warranties, and hereby expressly disclaims all warranties of
merchantability or fitness for a particular purpose with respect to the EAFE
Index or any data included therein. Without limiting any of the foregoing, in no
event shall Morgan Stanley have any liability for any direct, indirect, special,
punitive, consequential or any other damages (including lost profits) even if
notified of the possibility of such damages.
S&P 500 Index and S&P 400 Index. The Trust, on behalf of the S&P 500
Fund, one of the Underlying Funds, has entered into a licensing agreement which
authorizes the Fund to use the trademarks of the McGraw-Hill Companies, Inc.
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<PAGE> 86
Standard & Poor's 500, S&P 500(R), Standard & Poor's 400, and S&P
400(R) are trademarks of The McGraw-Hill Companies, Inc. The S&P 500 Index Fund
and the Mid Cap Index Fund are not sponsored, endorsed, sold or promoted by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc.("S&P"). S&P
makes no representation or warranty, expressed or implied, to the shareholders
of the Funds or any member of the public regarding the advisability of investing
in securities generally or in the Funds particularly or the ability of the S&P
500 Index or the S&P 400 Index to track general stock market performance. S&P's
only relationship to the Funds or the applicable adviser is the licensing of
certain trademarks and trade names of S&P and of the S&P 500 and S&P 400 indices
which are determined, composed and calculated by S&P without regard to the
Funds. S&P has no obligation to take the needs of the Funds or their
shareholders into consideration in determining, composing or calculating the S&P
500 and S&P 400 Indices. S&P is not responsible for or has not participated in
the determination of the prices and amount of the Funds' shares or the timing of
the issuance or sale of Fund shares or in the determination or calculation of
the equation by which Fund shares are redeemed. S&P has no obligation or
liability in connection with the administration, marketing or trading of the
Funds. S&P does not guarantee the accuracy makes no warranty, expressed or
implied as to the results to be obtained by the Funds, shareholders of the
Funds, or any other person or entity from the use of the S&P 500 or S&P 400
Indices or any data included therein. Without limiting any of the foregoing, in
no event shall S&P 500 and S&P 400 Indices have any liability for any special,
punitive, indirect, or consequential damages, including lost profits even if
notified of the possibility of such damages.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of each Fund
which cannot be changed without the authorization of the majority of the
outstanding shares of the Fund for which a change is proposed. The vote of the
majority of the outstanding securities means the vote of (A) 67% or more of the
voting securities present at such meeting, if the holders of more than 50% of
the outstanding voting securities are present or represented by proxy or (B) a
majority of the outstanding securities, whichever is less. None of the following
restrictions will prevent a Fund from investing all of its assets in shares of
one or more other registered investment companies.
Each of the Index Funds and the Investor Destinations Series:
- - May not borrow money or issue senior securities, except that each Fund may
enter into reverse repurchase agreements and may otherwise borrow money and
issue senior securities as and to the extent permitted by the 1940 Act or
any rule, order or interpretation thereunder.
- - May not purchase or sell real estate, except that each Fund may acquire
real estate through ownership of securities or instruments and may purchase
or sell securities issued by entities or investment vehicles that own or
deal in real estate (including interests therein) or instruments secured by
real estate (including interests therein).
- - May not lend any security or make any other loan, except that each Fund may
purchase or hold debt securities and lend portfolio securities in
accordance with its investment objective and policies,
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make time deposits with financial institutions and enter into repurchase
agreements.
- - May not act as an underwriter of another issuer's securities, except to the
extent that the Fund may be deemed an underwriter within the meaning of the
Securities Act in connection with the purchase and sale of portfolio
securities.
- - May not purchase or sell commodities or commodities contracts, except to
the extent disclosed in the current Prospectus and Statement of Additional
Information of such Fund.
- - May not purchase the securities of any issuer if, as a result, 25% or more
than (taken at current value) of the Fund's total assets would be invested
in the securities of issuers, the principal activities of which are in the
same industry; provided, that in replicating the weightings of a particular
industry in its target index, a Series or Fund may invest more than 25% of
its total assets in securities of issuers in that industry.
The following are the non-fundamental operating policies of the Funds
which may be changed by the Board of Trustees of the Trust without shareholder
approval:
Each Fund may not:
- - Sell securities short, unless the Fund owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short or
unless it covers such short sales as required by the current rules and
positions of the SEC or its staff, and provided that short positions in
forward currency contracts, options, futures contracts, options on futures
contracts, or other derivative instruments are not deemed to constitute
selling securities short.
- - Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions; and
provided that margin deposits in connection with options, futures
contracts, options on futures contracts, transactions in currencies or
other derivative instruments shall not constitute purchasing securities on
margin.
- - Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid.
- - Pledge, mortgage or hypothecate any assets owned by the Fund in excess of
33 1/3% of the Fund's total assets at the time of such pledging, mortgaging
or hypothecating.
TRUSTEES AND OFFICERS OF THE TRUST
The business and affairs of the Trust are managed under the direction
of its Board of Trustees. The Board of Trustees sets and reviews policies
regarding the operation of the Trust, and directs the officers to perform the
daily functions of the Trust.
The principal occupation of the Trustees and Officers during the last
five years, their ages, their addresses and their
36
<PAGE> 88
affiliations are:
JOHN C. BRYANT, Trustee*, Age 63
411 Oak St., Suite 306, Cincinnati, Ohio 45219
Dr. Bryant is Executive Director, Cincinnati Youth Collaborative, a partnership
of business, government, schools and social service agencies to address the
educational needs of students. He was formerly Professor of Education,
Wilmington College.
C. BRENT DEVORE, Trustee, Age 58
North Walnut and West College Avenue, Westerville, Ohio
Dr. DeVore is President of Otterbein College.
SUE A. DOODY, Trustee, Age 64
169 East Beck Street, Columbus, Ohio
Ms. Doody is President of Lindey's Restaurant, Columbus, Ohio. She is an active
member of the Greater Columbus Area Chamber of Commerce Board of Trustees.
ROBERT M. DUNCAN, Trustee*, Age 71
1397 Haddon Road, Columbus, Ohio
Mr. Duncan is a member of the Ohio Elections Commission. He was formerly
Secretary to the Board of Trustees of The Ohio State University. Prior to that,
he was Vice President and General Counsel of The Ohio State University.
THOMAS J. KERR, IV, Trustee*, Age 65
4890 Smoketalk Lane, Westerville, Ohio
Dr. Kerr is President Emeritus of Kendall College. He was formerly President of
Grant Hospital Development Foundation.
DOUGLAS F. KRIDLER, Trustee, Age 43
55 E. State Street, Columbus, Ohio
Mr. Kridler is President of the Columbus Association of Performing Arts.
DIMON R. MCFERSON, Trustee*+, Age 61
One Nationwide Plaza, Columbus, Ohio
Mr. McFerson is President and Chief Executive Officer of the Nationwide
Insurance Enterprise and is Chairman and Chief Executive Officer of Nationwide
Advisory Services, Inc.
NANCY C. THOMAS, Trustee+, Age 64
10835 Georgetown Road, NE, Louisville, Ohio
Ms. Thomas is a farm owner and operator. She is also a Director of the
Nationwide Insurance Companies and associated companies.
DAVID C. WETMORE, Trustee, Age 50
11495 Sunset Hills Rd - Suite #210, Reston, Virginia
37
<PAGE> 89
Mr. Wetmore is the Managing Director of The Updata Capital, a venture capital
firm.
JAMES F. LAIRD, JR., Treasurer, Age 42
Three Nationwide Plaza, Columbus, Ohio
Mr. Laird is Vice President and General Manager of Nationwide Advisory Services,
Inc., the Distributor.
ELIZABETH A. DAVIN, Secretary, age 35
Three Nationwide Plaza, Columbus, Ohio
Ms. Davin is a member of Dietrich, Reynolds & Koogler, the Trust's legal
counsel.
+ A Trustee who is an "interested person" of the Trust as defined in the
Investment Company Act.
* Members of the Executive Committee. Mr. McFerson is Chairman. The Executive
Committee has the authority to act for the Board of Trustees except as provided
by law and except as specified in the Trust's Bylaws.
Bryant, Doody, DeVore, Duncan, Kerr, Kridler and Wetmore are also
Trustees, and Laird and Davin are also Officers of Nationwide Separate
Account Trust and Nationwide Asset Allocation Trust, registered investment
companies in the Nationwide Fund Complex.
All Trustees and Officers of the Trust own less than 1% of its
outstanding shares.
The Trustees receive fees and reimbursement for expenses of attending
board meetings from the Trust. VMF and UBT reimburse the Trust for fees and
expenses paid to Trustees who are interested persons of the Trust. The
Compensation Table below sets forth the total compensation to be paid to the
Trustees of the Trust, before reimbursement, for the fiscal period ended October
31, 1999. In addition, the table sets forth the total compensation to be paid to
the Trustees from all funds in the Nationwide Fund Complex, including the
predecessor investment companies to the Trust, for the fiscal year ended October
31, 1999. Trust officers receive no compensation from the Trust in their
capacity as officers.
38
<PAGE> 90
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION
RETIREMENT
AGGREGATE BENEFITS ANNUAL TOTAL
COMPENSATION ACCRUED AS BENEFITS COMPENSATION
NAME OF PERSON, FROM PART OF TRUST UPON FROM THE FUND
POSITION THE TRUST EXPENSES RETIREMENT COMPLEX**
<S> <C> <C> <C> <C>
John C. Bryant, Trustee $ ______ --0-- --0-- $______
C. Brent DeVore, Trustee ______ --0-- --0-- ______
Sue A. Doody, Trustee ______ --0-- --0-- ______
Robert M Duncan, Trustee ______ --0-- --0-- ______
Thomas J. Kerr, IV, Trustee ______ --0-- --0-- ______
Douglas F. Kridler, Trustee ______ --0-- --0-- ______
Dimon R. McFerson, Trustee --0-- --0-- --0-- --0--
Nancy C. Thomas, Trustee ______ --0-- --0-- ______
David C. Wetmore, Trustee ______ --0-- --0-- ______
</TABLE>
**The Fund Complex includes three trusts comprised of ______ investment company
funds or series.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
Under the terms of the Investment Advisory Agreement dated May 9, 1998
as amended as of December ___, 1999, Villanova Mutual Fund Capital Trust ("VMF")
manages the investment of the assets of the funds of the Trust, other than the
Index Funds, Morley Capital Accumulation Fund and Morley Enhanced Income Fund,
in accordance with the policies and procedures established by the Trustees. With
respect to Nationwide Mid Cap Growth Fund, Growth Fund, Nationwide Fund, Bond
Fund, Tax-Free Income Fund, Long-Term U.S. Government Bond Fund, Intermediate
U.S. Government Bond Fund, and Money Market Fund and each of the Investor
Destinations Series, VMF manages the day-to-day investments of the assets of
such Funds. With respect to each of the other funds of the Trust, VMF provides
investment management evaluation services in initially selecting and monitoring
on an ongoing basis the performance of the subadvisers to such Funds, who each
manage the investment portfolio of a particular fund. VMF is also authorized to
select and place portfolio investments on behalf of the funds which engage
subadvisers; however VMF does not intend to do so at this time.
VMF pays the compensation of the Trustees and officers affiliated with
VMF. VMF also furnishes, at its own expense, all necessary administrative
services, office space, equipment, and clerical personnel for servicing the
investments of the Trust and maintaining its investment advisory facilities, and
executive and supervisory personnel for managing the investments and effecting
the portfolio transactions of the Trust.
39
<PAGE> 91
The Investment Advisory Agreement also specifically provides that VMF,
including its directors, officers, and employees, shall not be liable for any
error of judgment, or mistake of law, or for any loss arising out of any
investment, or for any act or omission in the execution and management of the
Trust, except for willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of reckless disregard of its obligations
and duties under the Agreement. The Agreement will continue in effect for an
initial period of two years and thereafter shall continue automatically for
successive annual periods provided such continuance is specifically approved at
least annually by the Trustees, or by vote of a majority of the outstanding
voting securities of the Trust, and, in either case, by a majority of the
Trustees who are not parties to the Agreement or interested persons of any such
party. The Agreement terminates automatically in the event of its "assignment",
as defined under the 1940 Act. It may be terminated as to a Fund without penalty
by vote of a majority of the outstanding voting securities of that Fund, or by
either party, on not less than 60 days written notice. The Agreement further
provides that VMF may render similar services to others.
The Trust pays the compensation of the Trustees who are not interested
persons of VMF and all expenses (other than those assumed by VMF), including
governmental fees, interest charges, taxes, membership dues in the Investment
Company Institute allocable to the Trust; fees under the Trust's Fund
Administration Agreement; fees and expenses of independent certified public
accountants, legal counsel, and any transfer agent, registrar, and dividend
disbursing agent of the Trust; expenses of preparing, printing, and mailing
shareholders' reports, notices, proxy statements, and reports to governmental
offices and commissions; expenses connected with the execution, recording, and
settlement of portfolio security transactions; insurance premiums; fees and
expenses of the custodian for all services to the Trust; expenses of calculating
the net asset value of shares of the Trust; expenses of shareholders' meetings;
and expenses relating to the issuance, registration, and qualification of shares
of the Trust. VMF reimburses the Trust for fees and expenses paid to Trustees
who are interested persons of the Trust.
VMF, a Delaware business trust, is a wholly owned subsidiary of
Villonova Capital, Inc., 97% of the common stock of which is held by Nationwide
Financial Services, Inc. (NFS). NFS, a holding company, has two classes of
common stock outstanding with different voting rights enabling Nationwide
Corporation (the holder of all of the outstanding Class B common stock) to
control NFS. Nationwide Corporation is also a holding company in the Nationwide
Insurance Enterprise. All of the Common Stock of Nationwide Corporation is held
by Nationwide Mutual Insurance Company (95.3%) and Nationwide Mutual Fire
Insurance Company (4.7%), each of which is a mutual company owned by its
policyholders.
Prior to September 1, 1999, Nationwide Advisory Services, Inc. ("NAS")
served as the investment adviser to the then current funds of the Trust (except
for Morley Capital Accumulation Fund). Effective September 1, 1999, the
investment advisory services previously performed for such funds by NAS were
transferred to VMF, an affiliate of NAS and an indirect subsidiary of NFS. After
the transfer, there was no change in the fees charged for investment advisory
services to each of the Funds.
40
<PAGE> 92
For services provided under the Investment Advisory Agreement, VMF
receives an annual fee paid monthly based on average daily net assets of each
Fund according to the following schedule:
<TABLE>
<CAPTION>
FUND ASSETS FEE
<S> <C> <C>
Nationwide Mid Cap Growth Fund, $0 up to $250 million 0.60%
Nationwide Growth Fund, Nationwide $250 million up to $1 billion 0.575%
Fund and Nationwide Focus Fund $1 billion up to $2 billion 0.55%
$2 billion up to $5 billion 0.525%
$5 billion and more 0.50%
Nationwide Bond Fund, $0 up to $250 million 0.50%
Nationwide Tax-Free Income Fund, $250 million up to $1 billion 0.475%
Nationwide Long-Term U.S. Government $1 billion up to $2 billion 0.45%
Bond Fund, and Nationwide Intermediate $2 billion up to $5 billion 0.425%
U.S. Government Bond Fund $5 billion and more 0.40%
Nationwide Money Market Fund $0 up to $1 billion 0.40%
$1 billion up to $2 billion 0.38%
$2 billion up to $5 billion 0.36%
$5 billion and more 0.34%
Nationwide S&P 500 Index Fund $0 to $1.5 billion 0.13%
$1.5 billion up to $3 billion 0.12%
$3 billion and more 0.11%
Prestige Large Cap Value up to $100 million 0.75%
$100 million or more 0.70%
Prestige Large Cap Growth Fund up to $150 million 0.80%
$150 million or more 0.70%
Prestige Balanced Fund up to $100 million 0.75%
$100 million or more 0.70%
Prestige Small Cap Fund up to $100 million 0.95%
$100 million or more 0.80%
Prestige International Fund up to $200 million 0.85%
$200 million or more 0.80%
The Aggressive Fund all assets 0.13%
</TABLE>
41
<PAGE> 93
<TABLE>
<CAPTION>
FUND ASSETS FEE
<S> <C> <C>
The Moderately Aggressive Fund all assets 0.13%
The Moderate Fund all assets 0.13%
The Moderately Conservative Fund all assets 0.13%
The Conservative Fund all assets 0.13%
Nationwide Small Cap Value Fund II $0 up to $250 million 0.70%
$250 million up to $1 billion 0.675%
$1 billion up to $2 billion 0.65%
$2 billion up to $5 billion 0.625%
$5 billion and more 0.60%
Nationwide High Yield Bond Fund $0 up to $250 million 0.55%
$250 million up to $1 billion 0.525%
$1 billion up to $2 billion 0.50%
$2 billion up to $5 billion 0.475%
$5 billion and more 0.45%
</TABLE>
VMF has also agreed to waive advisory fees, and if necessary, reimburse
expenses in order to limit annual Fund operating expenses for certain of the
Funds as follows:
- - Nationwide Mid Cap Growth Fund to 1.25% for Class A shares, 2.00% for Class
B shares and 1.00% for Class D shares
- - Nationwide Long-Term U.S. Government Bond Fund and Nationwide Intermediate
U.S. Government Bond Fund to 1.04% for Class A shares, 1.64% for Class B
shares and 0.79% for Class D shares
- - Prestige Large Cap Value Fund to 1.15% for Class A shares, 1.90% for Class
B shares and 1.00% for Class Y shares
- - Prestige Large Cap Growth Fund to 1.20% for Class A shares, 1.95% for Class
B shares and 1.05% for Class Y shares
- - Prestige Balanced Fund to 1.10% for Class A shares, 1.85% for Class B
shares and 0.95% for Class Y shares
- - Prestige Small Cap Fund to 1.35% for Class A shares, 2.10% for Class B
shares and 1.20% for Class Y shares
- - Prestige Large Cap Value Fund to 1.30% for Class A shares, 2.05% for Class
B shares and 1.25% for Class Y shares
42
<PAGE> 94
- - Nationwide S&P 500 Index Fund to 0.48% for Class Y shares, 0.63% for Class
R shares and 0.35% for Local Fund shares
- - each of the Investor Destinations Series to 0.56% for Class A shares, 1.31%
for Class B shares and 0.36% for Service Class shares
- - Nationwide Focus Fund to 1.20% for Class A shares, 1.70% for Class B shares
and 0.75% for Institutional Class shares
- - Nationwide Small Cap Value Fund II to 1.35% for Class A shares, 1.85% for
Class B shares and 1.00% for Institutional Class shares
- - Nationwide High Yield Bond Fund to 1.20% for Class A shares, 1.80% for
Class B shares and 0.85% for Institutional Class shares
In the interest of limiting the expenses of each of the Funds listed
above (except the Nationwide MidCap Growth Fund, the Nationwide Long-Term U.S.
Government Bond Fund, the Nationwide Intermediate U.S. Government Bond Fund and
the Nationwide S&P 500 Index Fund, VMF has entered into an expense limitation
agreement with the Fund ("Expense Limitation Agreement"). Reimbursement by the
Fund of the advisory fees waived or limited and other expenses reimbursed by VMF
pursuant to the Expense Limitation Agreement may be made at a later date when
the Fund has reached a sufficient asset size to permit reimbursement to be made
without causing the total annual operating expense ratio of the Fund to exceed
the limits set forth above. No reimbursement will be made unless: (i) the Fund's
assets exceed $100 million; (ii) the total annual expense ratio of the Class
making such reimbursement is less than the limit set forth above; and (iii) the
payment of such reimbursement is approved by the Board of Trustees on a
quarterly basis. Except as provided for in the Expense Limitation Agreement,
reimbursement of amounts previously waived or assumed by VMF is not permitted.
VMF may from time to time waive some or all of its investment advisory
fee or other fees for any of the fund of the Trust. The waiver of such fees will
cause the total return and yield of a fund to be higher than they would
otherwise be in the absence of such a waiver.
During the fiscal years ended October 31, 1999, 1998 and 1997, VMF/NAS
received the following fees for investment advisory services*:
<TABLE>
<CAPTION>
Years Ended October 31,
FUND 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Mid Cap Growth $_______ $61,706 $63,883
Growth $_______ 4,894,110 3,750,599
Nationwide Fund $_______ 9,977,231 5,938,011
Bond $_______ 647,809 629,068
Tax-Free Income
$_______ 1,505,626 1,810,070
LT U.S. Govt. $_______ 254,928 343,259
Intermediate U.S. Govt. $_______ 266,473 256,016
Money Market**
$_______ 3,857,898 3,519,727
</TABLE>
43
<PAGE> 95
<TABLE>
<S> <C> <C> <C>
Nationwide S&P 500 Index Fund $------- ---------- ---------
Prestige Large Cap Value Fund $------- ---------- ---------
Prestige Large Growth Fund $------- ---------- ---------
Prestige Balanced Fund $------- ---------- ---------
Prestige Small Cap Fund $------- ---------- ---------
Prestige International Fund $------- ---------- ---------
</TABLE>
* As of May 9, 1998, Nationwide Mid Cap Growth, Growth, Fund, Bond, Tax-Free
Income, Long-Term U.S. Government Bond, Intermediate U.S. Government Bond and
Money Market Funds acquired all of the assets of one or more series of
Nationwide Investing Foundation ("NIF"), Nationwide Investing Foundation II
("NIF II") and Financial Horizons Investment Trust ("FHIT") (collectively, the
"Acquired Funds"), in exchange for the assumption of the stated liabilities of
the Acquired Funds and a number of full and fractional Class D shares of the
applicable Fund (the Money Market Fund issued shares without class designation)
having an aggregate net asset value equal to the net assets of the Acquired
Funds as applicable (the "Reorganization").
** Net of waivers prior to the Reorganization of $221,174 and $389,150 for the
fiscal years ended October 31, 1998 and 1997, respectively.
During the period from July 24, 1998 (date of commencement of
operations) through October 31, 1998, NAS waived advisory fees for the S&P 500
Index Fund in the amount of $7,315. The Prestige Large Cap Value, Large Cap
Growth, Balanced, Small Cap and International Funds did not begin operations
until November 2, 1998.
The subadvisers for the certain of the funds are as follows:
<TABLE>
<CAPTION>
FUND SUBADVISER
<S> <C>
Prestige Large Cap Value Brinson Partners, Inc. ("Brinson Partners")
Prestige Large Cap Growth Goldman Sachs Asset Management ("GSAM")
Prestige Balanced J.P. Morgan Investment Management, Inc.
(J.P. Morgan")
Prestige Small Cap INVESCO Management & Research, Inc. ("IMR")
</TABLE>
44
<PAGE> 96
<TABLE>
<CAPTION>
FUND SUBADVISER
<S> <C>
Prestige International Lazard Asset Management ("Lazard")
Nationwide S&P 500 Index Fund Asset Management L.P. ("FAM")
</TABLE>
Brinson Partners, a Delaware corporation and an investment management
firm, is an indirect wholly-owned subsidiary of UBS AG, an internationally
diversified organization headquartered in Zurich, Switzerland, with operations
in many aspects of the financial services industry. GSAM is a separate operating
division of Goldman Sachs & Co., an investment banking firm whose headquarters
are in New York, New York. J.P. Morgan is a directly wholly owned subsidiary of
J.P. Morgan & Co. Incorporated, a bank holding company organized under the laws
of Delaware. J.P. Morgan offers a wide range investment management services and
acts as investment adviser to corporate and institutional clients. IMR is part
of a global investment organization, AMVESCAP plc. AMVESCAP plc is a
publicly-traded holding company that, through its subsidiaries, engages in the
business of investment management on an international basis. Lazard is a New
York-based division of Lazard Freres & Co. LLC, a limited liability company
registered as an investment adviser and providing investment management services
to client discretionary accounts. FAM, P.O. Box 9011, Princeton, New Jersey
08543-9011, is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are "controlling persons of
FAM as defined under the Investment Company Act of 1940 because of their
ownership of its voting securities or their power to exercise a controlling
influence over its management or policies.
Prior to _________________, 1999, The Dreyfus Corporation ("Dreyfus")
served as subadviser for the S&P 500 Index Fund. Dreyfus, 200 Park Avenue, New
York, N.Y. 10166, which was formed in 1947, is registered under the Investment
Advisers Act of 1940. Dreyfus is a wholly-owned subsidiary of Mellon Bank, N.A.,
which is a wholly-owned subsidiary of Mellon Bank Corporation.
Subject to the supervision of the VMF and the Trustees, each of the
Subadvisers manages the assets of the Fund listed above in accordance with the
Fund's investment objectives and policies. Each Subadviser makes investment
decisions for the Fund and in connection with such investment decisions places
purchase and sell orders for securities. For the investment management services
they provide to the Funds, the Subadvisers receive annual fees from VMF,
calculated at an annual rate based on the average daily net assets of the Funds,
in the following amounts:
<TABLE>
<CAPTION>
FUND ASSETS FEE
<S> <C> <C>
Large Cap Value Fund up to $100 million 0.35%
$100 million or more 0.30%
Large Cap Growth Fund up to $150 million 0.40%
$150 million or more 0.30%
Balanced Fund up to $100 million 0.35%
$100 million or more 0.30%
Small Cap Fund up to $100 million 0.55%
$100 million or more 0.40%
</TABLE>
45
<PAGE> 97
<TABLE>
<CAPTION>
FUND ASSETS FEE
<S> <C> <C>
International Fund up to $200 million 0.45%
$200 million or more 0.40%
S&P 500 Index Fund up to $250 million 0.07%
next $250 million 0.06%
next $500 million 0.05%
$1 billion or more 0.04%
</TABLE>
During the period from July 24, 1998 (date of commencement of
operations) through October 31, 1998, NAS paid $3,939 in subadvisory fees to
Dreyfus with respect to the S & P 500 Index Fund.
VMF and the Trust have received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows VMF
to hire, replace or terminate subadvisers without the approval of shareholders;
the order also allows VMF to revise a subadvisory agreement without shareholder
approval. If a new subadviser is hired, the change will be communicated to
shareholders within 90 days of such changes, and all changes will be approved by
the Trust's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Trust or VMF. The order is intended to facilitate the
efficient operation of the Funds and afford the Trust increased management
flexibility.
VMF provides to the Funds investment management evaluation services
principally by performing initial due diligence on prospective Subadvisers for
the Fund and thereafter monitoring the performance of the Subadviser through
quantitative and qualitative analysis as well as periodic in-person, telephonic
and written consultations with the Subadviser. VMF has responsibility for
communicating performance expectations and evaluations to the Subadviser and
ultimately recommending to the Trust's Board of Trustees whether the
Subadviser's contract should be renewed, modified or terminated; however, VMF
does not expect to recommend frequent changes of subadvisers. VMF will regularly
provide written reports to the Trust's Board of Trustees regarding the results
of its evaluation and monitoring functions. Although VMF will monitor the
performance of the Subadvisers, there is no certainty that the Subadviser or the
Fund will obtain favorable results at any given time.
THE INDEX FUNDS
With respect to the Index Funds, each Index Fund invests all of its
assets in shares of the corresponding Series of Quantitative Master Series
Trust. Accordingly, the Index Funds do not invest directly in portfolio
securities and do not require investment advisory services. All portfolio
management occurs at the level of Quantitative Master Series Trust. Quantitative
Master Series Trust has entered into a management agreement ("Management
Agreement") with Fund Asset Management, L.P. ("Fund Asset Management").
Fund Asset Management provides Quantitative Master Series Trust with
investment advisory and management services. Subject to the supervision of the
Board of Trustees of Quantitative
46
<PAGE> 98
Master Series Trust, Fund Asset Management is responsible for the actual
management of each Series' portfolio and constantly reviews the Series' holdings
in light of its own research analysis and that from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security
rests with Fund Asset Management. Fund Asset Management performs certain of the
other administrative services and provides all the office space, facilities,
equipment and necessary personnel for management of the Series.
Securities held by the Series of Quantitative Master Series Trust may
also be held by, or be appropriate investments for, other funds or investment
advisory clients for which Fund Asset Management or its affiliates act as an
adviser. Because of different objectives or other factors, a particular security
may be bought for one or more clients when one or more clients are selling the
same security. If purchases or sales of securities by Fund Asset Management for
the Series or other funds for which it acts as investment adviser or for its
advisory clients arise for consideration at or about the same time, transactions
in such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that transactions
on behalf of more than one client of Fund Asset Management or its affiliates
during the same period may increase the demand for securities being purchased or
the supply of securities being sold there may be an adverse effect on price.
As discussed in the Prospectus, Fund Asset Management receives for its
services to the Series monthly compensation at the annual rates of the average
daily net assets of each Series as follows:
<TABLE>
<CAPTION>
NAME OF SERIES MANAGEMENT FEE
<S> <C>
Master Small Cap Series.......................................................... 0.08%
Master Mid Cap Series............................................................ 0.01%
Master Aggregate Bond Series..................................................... 0.06%
Master International (Capitalization Weighted) Series............................ 0.01%
</TABLE>
The table below sets forth information about the total investment
advisory fees paid by the Series to Fund Asset Management, and any amount
voluntarily waived by Fund Asset Management.
<TABLE>
<CAPTION>
Small Cap Aggregate Bond International
Series Series Series
------ ------ ------
<S> <C> <C> <C>
December 31, 1997*
Contractual amount.............................. $ 36,425 $ 88,609 $100,102
Amount waived (if applicable)................... $ 36,425 $ 37,562 $ 35,546
December 31, 1998
Contractual amount.............................. $ 61,476 $ 238,378 $ 142,489
Amount waived (if applicable)................... $ 61,476 $ 2,537 $ 87,182
</TABLE>
* Period is from commencement of operations (April 3, 1997 for the
Aggregate Bond Index Series, and April 9, 1997 for the Small Cap Index
Series and the International Index Series).
47
<PAGE> 99
The Master Mid Cap Series did not commence operations until
______________, 1999.
The Management Agreement obligates Fund Asset Management to provide
investment advisory services and to pay all compensation of and furnish office
space for officers and employees of Quantitative Master Series Trust connected
with investment and economic research, trading and investment management of
Quantitative Master Series Trust, as well as the fees of all Trustees who are
affiliated persons of Fund Asset Management or any of their affiliates. Each
Series pays all other expenses incurred in the operation of the Series (except
to the extent paid by Merrill Lynch Funds Distributor), including, among other
things, taxes, expenses for legal and auditing services, costs of printing
proxies, stock certificates, shareholder reports, copies of the registration
statements, charges of the custodian, any sub-custodian and transfer agent,
expenses of portfolio transactions, expenses of redemption of shares, Securities
and Exchange Commission fees, expenses of registering the shares under federal,
state or foreign laws, fees and out-of-pocket expenses of unaffiliated Trustees,
accounting and pricing costs (including the daily calculation of net asset
value), insurance, interest, brokerage costs, litigation and other extraordinary
or non-recurring expenses, and other expenses properly payable by Quantitative
Master Series Trust or the Series. Merrill Lynch Funds Distributor will pay
certain of the expenses of Quantitative Master Series Trust incurred in
connection with the offering of its shares of beneficial interest of each of the
Series.
Fund Asset Management is a limited partnership, the partners of which
are ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of Fund Asset Management as defined under the 1940 Act
because of their ownership of its voting securities or their power to exercise a
controlling influence over its management or policies.
Unless earlier terminated as described below, the Management Agreement
will remain in effect from year to year with respect to each Series if approved
annually (a) by the Board of Trustees or by a majority of the outstanding shares
of the Series and (b) by a majority of the Trustees who are not parties to such
contract or interested persons (as defined in the 1940 Act) of any such party.
Such contract is not assignable and may be terminated without penalty on 60
days' written notice at the option of either party thereto or by the vote of the
shareholders of the Series.
MORLEY CAPITAL ACCUMULATION AND ENHANCED INCOME FUNDS
Under the terms of the Trust's investment advisory agreement with UBT
(the "UBT Advisory Agreement"), UBT manages the Morley Capital Accumulation and
Enhanced Income Funds (the "Morley Funds") subject to the supervision and
direction of the Board of Trustees. UBT will: (i) act in strict conformity with
the Declaration of Trust and the 1940 Act, as the same may from time to time be
amended; (ii) manage the Morley Funds in accordance with the Funds' investment
objectives, restrictions and policies; (iii) make investment decisions for the
Morley Funds; and (iv) place purchase and sale orders for securities and other
financial instruments on behalf of the Morley Funds.
UBT has informed the Fund that, in
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<PAGE> 100
making its investment decisions, it does not obtain or use material inside
information in its possession or in the possession of any of its affiliates. In
making investment recommendations for the Fund, UBT will not inquire or take
into consideration whether an issuer of securities proposed for purchase or sale
by the Fund is a customer of UBT, its parent or its affiliates and, in dealing
with its customers, UBT, its parent and affiliates will not inquire or take into
consideration whether securities of such customers are held by any fund managed
by UBT or any such affiliate.
Morley Financial Services, Inc. ("MFS") owns 100% of the issued and
outstanding voting securities of UBT. MFS, an Oregon corporation, is a wholly
owned subsidiary of Villanova Capital Inc.
UBT is a state bank and trust company chartered in 1913 and reorganized
under the laws of the state of Oregon in 1992. UBT provides a range of
investment and fiduciary services to institutional clients. UBT maintains and
manages common and pooled trust funds invested primarily in fixed income assets
whose principal value is relatively stable. UBT currently has approximately $1.0
billion under management. UBT also acts as custodian with respect to similar
fixed income assets.
Under the terms of the UBT Advisory Agreement, UBT pays the Morley
Funds' pro rata share of the compensation of the Trustees who are interested
persons of the Trust and officers and employees of UBT. UBT also furnishes, at
its own expense, all necessary administrative services, office space, equipment,
and clerical personnel for servicing the investments of the Morley Funds and
maintaining its investment advisory facilities, and executive and supervisory
personnel for managing the investments and effecting the portfolio transactions
of the Morley Funds.
The UBT Advisory Agreement also specifically provides that UBT,
including its directors, officers, and employees, shall not be liable for any
error of judgment, or mistake of law, or for any loss arising out of any
investment, or for any act or omission in the execution and management of the
Morley Funds, except for willful misfeasance, bad faith, or gross negligence in
the performance of its duties, or by reason of reckless disregard of its
obligations and duties under the UBT Advisory Agreement. The UBT Advisory
Agreement will continue in effect for an initial period of two years and
thereafter shall continue automatically for successive annual periods provided
such continuance is specifically approved at least annually by the Trustees, or
by vote of a majority of the outstanding voting securities of the Fund, and, in
either case, by a majority of the Trustees who are not parties to the Agreement
or interested persons of any such party. The UBT Advisory Agreement terminates
automatically in the event of its "assignment", as defined under the 1940 Act.
It may be terminated as to a Morley Fund without penalty by vote of a majority
of the outstanding voting securities of the Fund, or by either party, on not
less than 60 days written notice. The UBT Advisory Agreement further provides
that UBT may render similar services to others.
Subject to the Morley Funds' Expense Limitation Agreements, the Trust
pays the compensation of the Trustees who are not interested persons of the
Trust and all expenses (other than those assumed by UBT), including governmental
fees, interest charges, taxes, membership dues in the Investment Company
Institute allocable to the Trust; fees under the Trust's Fund Administration
Agreement; fees and expenses of independent certified public accountants, legal
counsel, and any
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<PAGE> 101
transfer agent, registrar, and dividend disbursing agent of the Trust; expenses
of preparing, printing, and mailing shareholders' reports, notices, proxy
statements, and reports to governmental offices and commissions; expenses
connected with the execution, recording, and settlement of portfolio security
transactions, insurance premiums, fees and expenses of the custodian for all
services to the Trust; and expenses of calculating the net asset value of shares
of the Trust, expenses of shareholders' meetings, and expenses relating to the
issuance, registration, and qualification of shares of the Trust.
As compensation for UBT's services to the Morley Capital Accumulation
Fund, the Fund is obligated to pay UBT a fee computed and accrued daily and paid
monthly at an annual rate of 0.35% of the average daily net assets of the Fund.
As of October 31, 1999, the Fund had incurred investment advisory fees in the
amount of $___________. In the interest of limiting the expenses of the Fund,
UBT has entered into an expense limitation agreement with the Fund ("Expense
Limitation Agreement"). Pursuant to the Expense Limitation Agreement, UBT has
agreed to waive or limit its fees and to assume other expenses (except for Rule
12b-1 Fees) to the extent necessary to limit the total annual operating expenses
of each Class of the Fund (expressed as a percentage of average daily net assets
and excluding Rule 12b-1 Fees) to no more than 0.70% for ISC Shares 0.55% for IC
Shares and 0.70% for IRA Shares. Reimbursement by the Fund of the advisory fees
waived or limited and other expenses reimbursed by UBT pursuant to the Expense
Limitation Agreement may be made at a later date when the Fund has reached a
sufficient asset size to permit reimbursement to be made without causing the
total annual operating expense ratio of the Fund to exceed the limits set forth
above. No reimbursement will be made unless: (i) the Fund's assets exceed $50
million; (ii) the total annual expense ratio of the Class making such
reimbursement is less than the limit set forth above; and (iii) the payment of
such reimbursement is approved by the Board of Trustees on a quarterly basis.
Except as provided for in the Expense Limitation Agreement, reimbursement of
amounts previously waived or assumed by UBT is not permitted.
As compensation for UBT's services to the Morley Enhanced Income Fund,
the Fund is obligated to pay UBT a fee computed and accrued daily and paid
monthly at an annual rate of 0.35% of the average daily net assets of the Fund.
In the interest of limiting the expenses of the Fund, UBT has entered into an
expense limitation agreement with the Fund ("Expense Limitation Agreement").
Pursuant to the Expense Limitation Agreement, UBT has agreed to waive or limit
its fees and to assume other expenses (except for Rule 12b-1 Fees and
Administrative Service Fees) to the extent necessary to limit the total annual
operating expenses of each Class of the Fund to ___% for Class A, ___% for Class
Y and ____% for Institutional Class shares. Reimbursement by the Fund of the
advisory fees waived or limited and other expenses reimbursed by UBT pursuant to
the Expense Limitation Agreement may be made at a later date when the Fund has
reached a sufficient asset size to permit reimbursement to be made without
causing the total annual operating expense ratio of the Fund to exceed the
limits set forth above. No reimbursement will be made unless: (i) the Fund's
assets exceed $100 million; (ii) the total annual expense ratio of the Class
making such reimbursement is less than the limit set forth above; and (iii) the
payment of such reimbursement is approved by the Board of Trustees on a
quarterly basis. Except as provided for in the Expense Limitation Agreement,
reimbursement of amounts previously waived or assumed by UBT is not permitted.
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<PAGE> 102
DISTRIBUTOR
NAS serves as underwriter for each of the Funds in the continuous
distribution of its shares pursuant to a Underwriting Agreement dated as of May
9, 1998, as amended as of December ____, 1999 (the "Underwriting Agreement").
Unless otherwise terminated, the Underwriting Agreement will continue in effect
until May 9, 2000, and year to year thereafter for successive annual periods,
if, as to each Fund, such continuance is approved at least annually by (i) the
Trust's Board of Trustees or by the vote of a majority of the outstanding shares
of that Fund, and (ii) the vote of a majority of the Trustees of the Trust who
are not parties to the Underwriting Agreement or interested persons (as defined
in the 1940 Act) of any party to the Underwriting Agreement, cast in person at a
meeting called for the purpose of voting on such approval. The Underwriting
Agreement may be terminated in the event of any assignment, as defined in the
1940 Act.
In its capacity as Distributor, NAS solicits orders for the sale of
shares, advertises and pays the costs of advertising, office space and the
personnel involved in such activities. NAS receives no compensation under the
Underwriting Agreement with the Trust, but may retain all or a portion of the
sales charge imposed upon sales of shares of the Funds.
DISTRIBUTION PLAN
The Funds have adopted a Distribution Plan (the "Plan") under Rule
12b-1 of the 1940 Act. The Plan permits the Funds to compensate NAS, as the
Funds' Distributor, for expenses associated with the distribution of shares of
the Funds. Although actual distribution expenses may be more or less, under the
Plan the Funds pay NAS an annual fee in an amount that will not exceed the
following amounts:
- 0.25% of the average daily net assets of Class A shares of each Fund;
- 0.25% of the average daily net assets of Service Class shares of the
Investor Destinations Series;
- 1.00% of the average daily net assets of Class B shares of the Index
Funds; and
- 1.00% of the average daily net assets of Class B shares of the
Investor Destinations Series.
Distribution expenses paid by NAS may include the costs of marketing,
printing and mailing prospectuses and sales literature to prospective investors,
advertising, and compensation to sales personnel and broker-dealers as well as
payments to broker-dealers for shareholder services.
As required by Rule 12b-1, the Plan was approved by the Board of
Trustees, including a majority of the Trustees who are not interested persons of
the Funds and who have no direct or indirect financial interest in the operation
of the Plan (the "Independent Trustees"). The Plan was initially approved by the
Board of Trustees on November 5, 1999, with respect to the Funds. The Plan may
be terminated as to a Class of a Fund by vote of a majority of the Independent
Trustees,
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<PAGE> 103
or by vote of majority of the outstanding shares of that Class. Any change in
the Plan that would materially increase the distribution cost to a Class
requires shareholder approval. The Trustees review quarterly a written report of
such costs and the purposes for which such costs have been incurred. The Plan
may be amended by vote of the Trustees including a majority of the Independent
Trustees, cast in person at a meeting called for that purpose. For so long as
the Plan is in effect, selection and nomination of those Trustees who are not
interested persons of the Trust shall be committed to the discretion of such
disinterested persons. All agreements with any person relating to the
implementation of the Plan may be terminated at any time on 60 days' written
notice without payment of any penalty, by vote of a majority of the Independent
Trustees or by a vote of the majority of the outstanding shares of the
applicable Class. The Plan will continue in effect for successive one-year
periods, provided that each such continuance is specifically approved (i) by the
vote of a majority of the Independent Trustees, and (ii) by a vote of a majority
of the entire Board of Trustees cast in person at a meeting called for that
purpose. The Board of Trustees has a duty to request and evaluate such
information as may be reasonably necessary for them to make an informed
determination of whether the Plan should be implemented or continued. In
addition the Trustees in approving the Plan as to a Fund must determine that
there is a reasonable likelihood that the Plan will benefit such Fund and its
shareholders.
The Board of Trustees of the Trust believes that the Plan is in the
best interests of the Funds since it encourages Fund growth and maintenance of
Fund assets. As the Funds grow in size, certain expenses, and therefore total
expenses per share, may be reduced and overall performance per share may be
improved.
NAS may enter into, from time to time, Rule 12b-1 Agreements with
selected dealers pursuant to which such dealers will provide certain services in
connection with the distribution of a Fund's shares including, but not limited
to, those discussed above.
ADMINISTRATIVE SERVICES PLAN
Under the terms of an Administrative Services Plan, a Fund is permitted
to enter into Servicing Agreements with servicing organizations, such as NAS,
who agree to provide certain administrative support services in connection with
the Class A shares of the Funds, Service Class shares of the Investor
Destinations Series and Institutional Class shares of the Index Funds. Such
administrative support services include but are not limited to the following:
establishing and maintaining shareholder accounts, processing purchase and
redemption transactions, arranging for bank wires, performing shareholder
sub-accounting, answering inquiries regarding the Funds, providing periodic
statements showing the account balance for beneficial owners or for plan
participants or contract holders of insurance company separate accounts,
transmitting proxy statements, periodic reports, updated prospectuses and other
communications to shareholders and, with respect to meetings of shareholders,
collecting, tabulating and forwarding to the Trust executed proxies and
obtaining such other information and performing such other services as may
reasonably be required.
As authorized by the Administrative Services Plan, the Trust has
entered into a Servicing Agreement effective December ____, 1999, pursuant to
which Nationwide Financial Services, Inc. has
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<PAGE> 104
agreed to provide certain administrative support services in connection with
Class A shares and Service Class shares of each Fund held beneficially by its
customers. In consideration for providing administrative support services, NFS
and other entities with which the Trust may enter into Servicing Agreements
(which may include NAS) will receive a fee, computed at the annual rate of up to
0.25% of the average daily net assets of the Class A shares of each Fund, held
by customers of NFS or such other entity.
FUND ADMINISTRATION
Under the terms of a Fund Administration Agreement, Villanova SA
Capital Trust ("VSA"), a wholly owned subsidiary of Villanova Capital, Inc.,
provides for various administrative and accounting services, including daily
valuation of the Funds' shares, preparation of financial statements, tax
returns, and regulatory reports, and presentation of quarterly reports to the
Board of Trustees. For these services, each Fund pays VSA an annual fee based on
each Fund's average daily net assets at the following rates (with an annual
minimum fee of $_____ per Fund):
<TABLE>
<CAPTION>
FUND ASSETS FEE
<S> <C> <C>
The Aggressive, The Moderately $0 up to $250 million 0.07%
Aggressive, The Moderate, The $250 million and more 0.05%
Moderately Conservative and
The Conservative Funds
Small Cap Index Fund $0 up to $250 million 0.27%
$250 million and more 0.24%
Mid Cap Index Fund $0 up to $250 million 0.29%
$250 million and more 0.26%
International Index Fund $0 up to $250 million 0.34%
$250 million and more 0.31%
Bond Index Fund $0 up to $250 million 0.29%
$250 million and more 0.26%
</TABLE>
VSA has agreed to waive administration fees, and if necessary,
reimburse expenses in order to limit annual Fund operating expenses of the Index
Funds to 0.79% for Class A shares, 1.54% for Class B shares and 0.54% for
Institutional Class shares.
In the interest of limiting the expenses of each of the Index Funds
VSA has entered into an expense limitation agreement with the Fund ("Expense
Limitation Agreement"). Reimbursement by the Fund of the administration fees
waived or limited and other expenses reimbursed by VSA pursuant to the Expense
Limitation Agreement may be made at a later date when the Fund has reached a
sufficient asset size to permit reimbursement to be made without causing the
total annual operating expense ratio of the Fund to exceed the limits set forth
above. No reimbursement will be made unless:(i) the Fund's assets exceed $100
million; (ii) the total annual expense ratio of the class making such
reimbursement is less than the limit set forth above; and (iii) the payment of
such reimbursement is approved by the Board of Trustees on a quarterly basis.
Except as provided for in the Expense Limitation Agreement, reimbursement of
amounts previously waived by VSA is not permitted.
SUB-ADMINISTRATORS
VSA has entered into a Sub-Administration Agreement with BISYS Fund
Services Ohio, Inc. ("BISYS") to provide certain fund administration services
for each of the Funds. For these services, VSA pays BISYS a fee equal to the
greater of $50,000 of an annual fee at the following
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<PAGE> 105
rates based on the average daily net assets of the aggregate of all the funds
[of the Trust] that BISYS is providing such services for:
ASSETS FEE
$0 up to $13 million 0.045%
$13 million up to $25 million 0.02%
$25 million up to $50 million 0.015%
$50 million and more 0.01%
VSA has also entered into a Sub-Administration Agreement with Fund
Asset Management, L.P. that covers the fund accounting, custody and other
administrative expenses at the Series level with respect to the Index Funds
only. For these services, VSA pays Fund Asset Management, L.P. an annual fee
based on the average daily net assets as follows: 0.07% for the Small Cap Index
Fund, 0.09% for the Mid Cap Index Fund, 0.14% for the International Index Fund
and 0.09% for the Bond Index Fund.
TRANSFER AGENT
Nationwide Investors Services, Inc. ("NISI"), a wholly owned subsidiary
of VSA, Three Nationwide Plaza, Columbus, Ohio 43215, serves as transfer agent
and dividend disbursing agent for each of the Funds. For these services, NISI
receives an annual fee of ______ from each of the Funds.
CUSTODIAN
The Fifth Third Bank ("Fifth Third"), 38 Fountain Square Plaza,
Cincinnati, OH 45263, is the custodian for the Funds and makes all receipts and
disbursements under a Custody Agreement. Fifth Third performs no managerial or
policy-making functions for the Funds.
LEGAL COUNSEL
Dietrich, Reynolds & Koogler, One Nationwide Plaza, Columbus, OH 43215,
serves as the Trust's legal counsel.
AUDITORS
KPMG LLP, Two Nationwide Plaza, Columbus, OH 43215, serves as the
independent auditors for the Trust.
BROKERAGE ALLOCATION
THE INDEX FUNDS
Because the Index Funds will invest exclusively in shares of their
corresponding Series, it is expected that all transactions in portfolio
securities will be entered into by the Series. Subject to
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<PAGE> 106
policies established by the Board of Trustees of Quantitative Master Series
Trust, Fund Asset Management is primarily responsible for the execution of the
Series' portfolio transactions and the allocation of brokerage. Quantitative
Master Series Trust has no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities of the Series.
Where possible, Quantitative Master Series Trust deals directly with the dealers
who make a market in the securities involved except in those circumstances where
better prices and execution are available elsewhere. It is the policy of
Quantitative Master Series Trust to obtain the best results in conducting
portfolio transactions for the Series, taking into account such factors as price
(including the applicable dealer spread or commission), the size, type and
difficulty of the transaction involved, the firm's general execution and
operations facilities and the firm's risk in positioning the securities
involved. The portfolio securities of the Series generally are traded on a
principal basis and normally do not involve either brokerage commissions or
transfer taxes. The cost of portfolio securities transactions of the Series
primarily consists of dealer or underwriter spreads. While reasonable
competitive spreads or commissions are sought, Quantitative Master Series Trust
will not necessarily be paying the lowest spread or commission available.
Transactions with respect to the securities of small and emerging growth
companies in which the Series may invest may involve specialized services on the
part of the broker or dealer and thereby entail higher commissions or spreads
than would be the case with transactions involving more widely trading
securities.
Subject to obtaining the best price and execution, broker-dealers who
provide supplemental investment research (such as quantitative and modeling
information assessments and analyses of the business or prospects of a company,
industry or economic sector) to Fund Asset Management may receive orders for
transactions by Quantitative Master Series Trust. Information so received will
be in addition to and not in lieu of the services required to be performed by
Fund Asset Management under its Management Agreement and the expense of Fund
Asset Management will not necessarily be reduced as a result of the receipt of
such supplemental information. If in the judgment of Fund Asset Management
Quantitative Master Series Trust will be benefited by supplemental research
services, Fund Asset Management is authorized to pay brokerage commissions to a
broker-dealer furnishing such services which are in excess of commissions which
another broker-dealer may have charged for effecting the same transaction.
Supplemental investment research obtained from such broker-dealers might be used
by Fund Asset Management in servicing all of its accounts and all such research
might not be used by Fund Asset Management in connection with the Series.
For the fiscal period April 3, 1997 (commencement of operations) to
December 31, 1997, the Series paid brokerage commissions of $0 for the Master
Aggregate Bond Series. For the fiscal period April 9, 1997 (commencement of
operations) to December 31, 1997, the Series paid brokerage commissions of
$60,361 and $146,336 for the Master Small Cap Series and the Master
International (Capitalization Weighted) Series, respectively. The Series paid no
commissions to Merrill Lynch, Pierce, Fenner & Smith, Incorporated ("Merrill
Lynch"). For the fiscal year ended December 31, 1998, the following table shows
the amount of brokerage commissions paid by each Series to Merrill Lynch, the
percentage of each Series brokerage commissions paid to Merrill Lynch, the
percentage of each Series aggregate dollar amount of transactions involving the
payment of commissions effected through Merrill Lynch and aggregate brokerage
commissions paid by each Series:
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<PAGE> 107
<TABLE>
<CAPTION>
Small Cap Aggregate Bond International
Series Series Series
<S> <C> <C> <C>
Aggregate brokerage commissions
paid to Merrill Lynch....................... $ 0 $ 0 $ 1,299
% of Fund's aggregate brokerage
commissions paid to Merrill Lynch........... 0.00% 0.00% 1.75%
% of Fund's aggregate dollar amount
of transactions effected through
the broker.................................. 0.00% 0.00% 0.20%
Aggregate brokerage
Commissions paid............................ $ 50,264 $ 0 $ 74,373
</TABLE>
As of December 31, 1998, the Master Mid Cap Series had not yet
commenced operations.
Under the 1940 Act, persons affiliated with Quantitative Master Series
Trust and persons who are affiliated with such persons are prohibited from
dealing with Quantitative Master Series Trust as principal in the purchase and
sale of securities unless a permissive order allowing such transactions is
obtained from the Commission. Since transactions in the OTC market usually
involve transactions with dealers acting as principal for their own accounts,
affiliated persons of Quantitative Master Series Trust, including Merrill Lynch
and any of its affiliates, will not serve as Quantitative Master Series Trust's
dealer in such transactions. However, affiliated persons of Quantitative Master
Series Trust may serve as its broker in listed or OTC transactions conducted on
an agency basis provided that, among other things, the fee or commission
received by such affiliated broker is reasonable and fair compared to the fee or
commission received by non-affiliated brokers in connection with comparable
transactions. In addition, Quantitative Master Series Trust may not purchase
securities during the existence of any underwriting syndicate for such
securities of which Merrill Lynch is a member or in a private placement in which
Merrill Lynch serves as placement agent except pursuant to procedures adopted by
the Board of Trustees of Quantitative Master Series Trust that either comply
with rules adopted by the Commission or with interpretations of the Commission
staff.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the 1940 Act in order to seek
to recapture underwriting and dealer spreads from affiliated entities. The
Trustees of Quantitative Master Series Trust have considered all factors deemed
relevant and have made a determination not to seek such recapture at this time.
The Trustees will reconsider this matter from time to time.
Section 11(a) of the Exchange Act generally prohibits members of the
U.S. national securities exchanges from executing exchange transactions for
their affiliates and institutional accounts that they manage unless the member
(i) has obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth the
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<PAGE> 108
aggregate compensation received by the member in effecting such transactions,
and (iii) complies with any rules the Commission has prescribed with respect to
the requirements of clauses (i) and (ii). To the extent Section 11(a) would
apply to Merrill Lynch acting as a broker for Quantitative Master Series Trust
in any of its portfolio transactions executed on any such securities exchange of
which it is a member, appropriate consents have been obtained from Quantitative
Master Series Trust and annual statements as to aggregate compensation will be
provided to Quantitative Master Series Trust. Securities may be held by, or be
appropriate investments for, the Series as well as other funds or investment
advisory clients of Fund Asset Management.
Because of different objectives or other factors, a particular security
may be bought for one or more clients of Fund Asset Management or an affiliate
when one or more clients of Fund Asset Management or an affiliate are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve Quantitative Master Series Trust or
other clients or funds for which Fund Asset Management or an affiliate acts as
manager, transactions in such securities will be made, insofar as feasible, for
the respective funds and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of Fund Asset
Management or an affiliate during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
INVESTOR DESTINATIONS SERIES
Because the Investor Destinations Series will invest exclusively in
shares of the Underlying Funds and the Nationwide Contract, it is expected that
all transactions in portfolio securities will be entered into by the Underlying
Funds. And as described above, for the Underlying Funds which are the Index
Funds the transactions in portfolio securities will be entered into at the
Series level. For those Underlying Funds which are not Index Funds, the
following discussion describes their brokerage allocation policies.
VMF (or a Subadviser) is responsible for decisions to buy and sell
securities and other investments for the Funds, the selection of brokers and
dealers to effect the transactions and the negotiation of brokerage commissions,
if any. In transactions on stock and commodity exchanges in the United States,
these commissions are negotiated, whereas on foreign stock and commodity
exchanges these commissions are generally fixed and are generally higher than
brokerage commissions in the United States. In the case of securities traded on
the over-the-counter markets or for securities traded on a principal basis,
there is generally no commission, but the price includes a spread between the
dealer's purchase and sale price. This spread is the dealer's profit. In
underwritten offerings, the price includes a disclosed, fixed commission or
discount. Most short term obligations are normally traded on a "principal"
rather than agency basis. This may be done through a dealer (e.g., a securities
firm or bank) who buys or sells for its own account rather than as an agent for
another client, or directly with the issuer.
The primary consideration in portfolio security transactions is "best
price - best execution," i.e., execution at the most favorable prices and in the
most effective manner possible. Except as described below, VMF or a Subadviser
always attempts to achieve best price - best execution, and
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both VMF and the Subadvisers have complete freedom as to the markets in and the
broker-dealers through which they seek this result. In selecting broker-dealers,
VMF and each Subadviser will consider various relevant factors, including but
not limited to the size and type of the transaction, the nature and character of
the markets for the security or asset to be purchased or sold, the execution
efficiency, settlement capability, and financial condition of the
broker-dealer's firm, the broker-dealer's execution services (rendered on a
continuing basis), and the reasonableness of any commissions. In allocating
orders among brokers for execution on an [agency][agency only?] basis, in
addition to price and execution considerations, the usefuless of the brokers'
overall services is also considered. Services provided by brokerage firms
include efficient handling of orders, useful analyses of corporations,
industries and the economy, statistical reports and other related services for
which no charge is made by the broker above the negotiated brokerage
commissions.
Subject to the requirement of seeking best execution, securities may be
bought from or sold to broker-dealers who have furnished statistical, research,
and other information or services to VMF or a Subadviser. In placing orders with
such broker-dealers, VMF or a Subadviser will, where possible, take into account
the comparative usefulness of such information. Such information is useful to
VMF or a Subadviser even though its dollar value may be indeterminable, and its
receipt or availability generally does not reduce VMF's or a Subadviser's normal
research activities or expenses.
Fund portfolio transactions may be effected with broker-dealers who
have assisted investors in the purchase of variable annuity contracts or
variable insurance policies issued by Nationwide Life Insurance Company or
Nationwide Life & Annuity Insurance Company. However, neither such assistance
nor sale of other investment company shares is a qualifying or disqualifying
factor in a broker-dealer's selection, nor is the selection of any broker-dealer
based on the volume of shares sold.
There may be occasions when portfolio transactions for a Fund are
executed as part of concurrent authorizations to purchase or sell the same
security for trusts or other accounts (including other mutual funds) served by
VMF or a Subadviser or by an affiliated company thereof. Although such
concurrent authorizations potentially could be either advantageous or
disadvantageous to a Fund, they are effected only when VMF or a Subadviser
believes that to do so is in the interest of the Fund. When such concurrent
authorizations occur, the executions will be allocated in an equitable manner.
The Trustees periodically review VMF's and each Subadviser's
performance of their responsibilities in connection with the placement of
portfolio transactions on behalf of the Funds and review the commissions paid by
the Funds over representative periods of time to determine if they are
reasonable in relation to the benefits to the Funds.
Each Subadviser may cause a Fund to pay a broker-dealer who furnishes
brokerage and/or research services a commission that is in excess of the
commission another broker-dealer would have received for executing the
transaction if it is determined, pursuant to the requirements of Section 28(e)
of the Securities Exchange Act of 1934, that such commission is reasonable in
relation to the value of the brokerage and/or research services provided. Such
research services may include,
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<PAGE> 110
among other things, analyses and reports concerning issuers, industries,
securities, economic factors and trends, and portfolio strategy. Any such
research and other information provided by brokers to a Subadviser is considered
to be in addition to and not in lieu of services required to be performed by the
Subadviser under its subadvisory agreement with VMF. The fees paid to each of
the Subadvisers pursuant to its subadvisory agreement with VMF are not reduced
by reason of its receiving any brokerage and research services. The research
services provided by broker-dealers can be useful to a Subadviser in serving its
other clients or clients of the Subadviser's affiliates. Subject to the policy
of the Subadvisers to obtain best execution at the most favorable prices through
responsible broker-dealers, a Subadviser also may consider the broker-dealer's
sale of shares of any fund for which the Subadviser serves as investment
adviser, subadviser or administrator.
Under the 1940 Act, "affiliated persons" of a Fund are prohibited from
dealing with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. However,
each Fund may purchase securities from underwriting syndicates of which a
Subadviser or any of its affiliates, as defined in the 1940 Act, is a member
under certain conditions, in accordance with Rule 10f-3 under the 1940 Act.
Each of the Funds contemplate that, consistent with the policy of
obtaining best results, brokerage transactions may be conducted through
"affiliated brokers or dealers," as defined in the 1940 Act. Under the 1940 Act,
commissions paid by a Fund to an "affiliated broker or dealer" in connection
with a purchase or sale of securities offered on a securities exchange may not
exceed the usual and customary broker's commission. Accordingly, it is the
Funds' policy that the commissions to be paid to an affiliated broker-dealer
must, in the judgment of VMF or the appropriate Subadviser, be (1) at least as
favorable as those that would be charged by other brokers having comparable
execution capability and (2) at least as favorable as commissions
contemporaneously charged by such broker or dealer on comparable transactions
for the broker's or dealer's most favored unaffiliated customers, except for
accounts for which the affiliated broker or dealer acts as a clearing broker for
another brokerage firm and customers of an affiliated broker or dealer that, in
the opinion of a majority of the independent trustees, are not comparable to the
Fund. The Funds do not deem it practicable or in their best interests to solicit
competitive bids for commissions on each transaction. However, consideration
regularly is given to information concerning the prevailing level of commissions
charged on comparable transactions by other brokers during comparable periods of
time.
ADDITIONAL INFORMATION ON PURCHASES AND SALES
CLASS A SALES CHARGES
The chart below shows the Class A sales charges, which decrease as the amount of
your investment increases.
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CLASS A SHARES
<TABLE>
<CAPTION>
Sales charge as % Sales charge as %
Amount of purchase of offering price of amount invested
- ------------------ ----------------- ------------------
<S> <C> <C>
Less than $50,000 5.75% 6.10%
$50,000 to $99,999 4.50 4.71
$100,000 to $249,999 3.50 3.63
$250,000 to $499,999 2.50 2.56
$500,000 to $999,999 2.00 2.04
$1 million to $24,999,999 0.50 0.50
$25 million or more 0.25 0.25
</TABLE>
NET ASSET VALUE PURCHASE PRIVILEGE (CLASS A SHARES ONLY).--THE SALES CHARGE
APPLICABLE TO CLASS A SHARES MAY BE WAIVED FOR THE FOLLOWING PURCHASES DUE TO
THE REDUCED MARKETING EFFORT REQUIRED BY NAS:
(1) shares sold to other registered investment companies affiliated with VMF,
(2) shares sold:
(a) to any pension, profit sharing, or other employee benefit plan
for the employees of VMF, any of its affiliated companies, or
investment advisory clients and their affiliates;
(b) to any endowment or non-profit organization;
(c) to any pension, profit sharing, or deferred compensation plan
which is qualified under Sections 401(a), 403(b) or 457 of the
Internal Revenue Code of 1986 as amended, dealing directly
with NAS with no sales representative involved upon written
assurance of the purchaser that the shares are acquired for
investment purposes and will not be resold except to the
Trust;
(d) to any life insurance company separate account registered as a
unit investment trust;
(e) to any person purchasing through an account with an
unaffiliated brokerage firm having an agreement with NAS to
waive sales charges for those persons;
(f) to any directors, officers, full-time employees, sales
representatives and their employees or any investment advisory
clients of a broker-dealer having a dealer/selling agreement
with NAS;
(g) to any person who pays for such shares with the proceeds of
mutual fund shares redeemed from an NAS brokerage account; to
qualify, the person must have paid an initial sales charge or
CDSC on the redeemed shares and the purchase of Class A shares
must be made within 60 days of the redemption. This waiver
must be requested when
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the purchase order is placed, and NAS may require evidence of
qualification for this waiver;
(h) to any person who pays for such shares with the proceeds of
mutual funds shares redeemed from an account in the NEA
Valuebuilder Mutual Fund Program. This waiver is only
available for the initial purchase if shares were made with
such proceeds. NAS may require evidence of qualification for
such waiver; and
(i) to certain employer-sponsored retirement plan including
pension, profit sharing or deferred compensation plans which
are qualified under Sections 401(a), 403(b) or 457 of the
Internal Revenue Code.
(j) Trustees and retired Trustees of Nationwide Mutual Funds
(including its predecessor Trusts);
(k) Directors, officers, full-time employees, sales
representatives and their employees, and retired directors,
officers, employees, and sales representatives, their spouses,
children or immediate relatives (including mother, father,
brothers, sisters, grandparents and grandchildren) and
immediate relatives of deceased employees of any member of
Nationwide Insurance and Nationwide Financial companies, or
any investment advisory clients of VMF, VSA, NAS and their
affiliates; and
(l) Directors, officers, full-time employees, their spouses,
children or immediate relatives and immediate relatives of
deceased employees of any sponsor group which may be
affiliated with the Nationwide Insurance and Nationwide
Financial companies from time to time (including but not
limited to, Farmland Insurance Industries, Inc., Maryland Farm
Bureau, Inc., Ohio Farm Bureau Federation, Inc., Pennsylvania
Farmers' Association, Ruralite Services, Inc., and Southern
States Cooperative).
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<PAGE> 113
CDSC APPLICABLE FOR CLASS A SHARES
Employer sponsored retirement plans which purchase Class A shares at
net asset value (other than those investing in Funds through a variable
insurance product) are subject to a CDSC, payable to NAS, of 1.00% if a finder's
fee (as described below) was paid on the purchase of the shares and the shares
are redeemed within the first year after purchase, 0.50% if redeemed within the
second year and 0.25% if redeemed within the third year. The sales charge is
applied to the original purchase price, or the current market value of the
shares being sold, whichever is less. A CDSC will be charged on redemptions of
$1 million or more within a 12 month period.
NAS will pay a finder's fee at the plan sponsor level at the time of purchase to
the dealer of record at the time of purchase at the following rates:
1.00% for sales of the Funds of $1 million up to $3 million 0.50% for sales of
the Funds of $ 3 million up to $50 million 0.25% for sales of the Funds of $50
million or more
The finder's fee is paid on the aggregate assets of all Funds held at the plan
sponsor level.
SIGNATURE GUARANTEE
A signature guarantee is required if the redemption is over $100,000,
if your account registration has changed within the last 30 days, if the
redemption check is made payable to anyone other than the registered
shareholder, if the proceeds are sent to a bank account not previously
designated, or if are mailed to an address other than the address of record. NAS
reserves the right to require a signature guarantee in other circumstances,
without notice. Based on the circumstances of each transaction, NAS reserves the
right to require that your signature be guaranteed by an authorized agent of an
"eligible guarantor institution," which includes, but is not limited to, certain
banks, credit unions, savings associations, and member firms of national
securities exchanges. A signature guarantee is designed to protect the
shareholder by helping to prevent an unauthorized person from redeeming shares
and obtaining the proceeds. A notary public is not an acceptable guarantor. In
certain special cases (such as corporate or fiduciary registrations), additional
legal documents may be required to ensure proper authorizations. If NAS decides
to require signature guarantees in all circumstances, shareholders will be
notified in writing prior to implementation of the policy.
VALUATION OF SHARES
The net asset value per share for each of the Funds is determined 15
minutes after the close of regular trading on the New York Stock Exchange
(usually 4 P.M. Eastern Time), each day that the Exchange is open. The time at
which a Fund's net asset value per share is calculated is referred to as the
"Valuation Time."
The Funds will not compute net asset value on customary business
holidays, including Christmas, New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day and
Thanksgiving.
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<PAGE> 114
The net asset value per share of a class is computed by adding the
value of all securities and other assets in a Fund's portfolio allocable to such
class, deducting any liabilities allocable to such class and any other
liabilities charged directly to that class and dividing by the number of shares
outstanding in such class.
THE INDEX FUNDS
The principal assets of each Index Fund will normally be its interest
in the underlying Series, which will be valued at its net asset value. Portfolio
securities that are traded on stock exchanges are valued at the last sale price
(regular way) on the exchange on which such securities are traded as of the
close of business on the day the securities are being valued or, lacking any
sales, at the last available bid price for long positions and at the last
available ask price for short positions. In cases where securities are traded on
more than one exchange, the securities are valued on the exchange designated by
or under the authority of the Trustees of Quantitative Master Series Trust as
the primary market. Long positions in securities traded in the OTC market are
valued at the last available bid price in the OTC market prior to the time of
valuation. Portfolio securities that are traded both in the OTC market and on a
stock exchange are valued according to the broadest and most representative
market. Short positions in securities traded in the OTC market are valued at the
last available ask price in the OTC market prior to the time of valuation. When
the Series writes an option, the amount of the premium received is recorded on
the books of the Series as an asset and an equivalent liability. The amount of
the liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Series are valued at their last sale price in
the case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including financial futures
contracts and related options, are stated at market value. Securities and assets
for which market quotations are not readily available are valued at fair value
as determined in good faith by or under the direction of the Trustees of
Quantitative Master Series Trust, including valuations furnished by a pricing
service retained by Quantitative Master Series Trust. Such valuations and
procedures will be reviewed periodically by the Trustees.
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the Exchange. The values of such
securities used in computing the net asset value of a Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the Exchange. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
Exchange that will not be reflected in the computation of a Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Trustees of Quantitative Master Series Trust.
Each investor in Quantitative Master Series Trust may add to or reduce
its investment in any Series on each day the Exchange is open. The value of each
investor's (including the respective Index
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<PAGE> 115
Funds') interest in a Series will be determined as of 15 minutes after the close
of business on the Exchange (generally 4:00 p.m., New York Time) by multiplying
the net asset value of the Series by the percentage, effective for that day,
that represents that investor's share of the aggregate interests in such Series.
Any additions or withdrawals, which are to be effected on that day, will then be
effected. The investor's percentage of the aggregate beneficial interests in a
Series will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Series as
of the time or determination on such day plus or minus, as the case may be, the
amount of any additions to or withdrawals from the investor's investment in the
Series effected on such day, and (ii) the denominator of which is the aggregate
net asset value of the Series as of such time on such day plus or minus, as the
case may be, the amount of the net additions to or withdrawals from the
aggregate investments in the Series by all investors in the Series. The
percentage so determined will then be applied to determine the value of the
investor's interest in such Series as of 15 minutes after the close of business
of the Exchange on the next day the Exchange is open.
INVESTOR DESTINATIONS SERIES
Shares of the Underlying Funds are valued at their respective net asset
values as reported to VSA. Other assets of the Funds are valued at their current
market value if market quotations are readily available. If market quotations
are not available, or if VSA determines that the price of a security does not
represent its fair value, these assets are valued at fair value in accordance
with procedures adopted by the Board of Trustees.
INVESTOR STRATEGIES
1 AUTOMATIC ASSET ACCUMULATION--This is a systematic investment strategy which
combines automatic monthly transfers from your personal checking account to your
mutual fund account with the concept of Dollar Cost Averaging. With this
strategy, you invest a fixed amount monthly over an extended period of time,
during both market highs and lows. Dollar Cost Averaging can allow you to
achieve a favorable average share cost over time since your fixed monthly
investment buys more shares when share prices fall during low markets, and fewer
shares at higher prices during market highs. Although no formula can assure a
profit or protect against loss in a declining market, systematic investing has
proven a valuable investment strategy in the past.
You can get started with Automatic Asset Accumulation for as little as
$25 a month in a Fund.
2 AUTOMATIC ASSET TRANSFER--This systematic investment plan allows you to
transfer $25 or more to a Fund from another Fund systematically, monthly or
quarterly, after Fund minimums have been met. The money is transferred on the
25th day of the month as selected or on the preceding business day. Dividends of
any amount can be moved automatically from one Fund to another at the time they
are paid. This strategy can provide investors with the benefits of Dollar Cost
Averaging through an opportunity to achieve a favorable average share cost over
time. With this plan, your fixed monthly or quarterly transfer from the Fund to
any other Fund you select buys more shares when share
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<PAGE> 116
prices fall during low markets and fewer shares at higher prices during market
highs. Although no formula can assure a profit or protect against loss in a
declining market, systematic investing has proven a valuable investment strategy
in the past.
3 AUTOMATIC WITHDRAWAL PLAN ($50 OR MORE)--You may have checks for any fixed
amount of $50 or more automatically sent bi-monthly, monthly, quarterly, three
times/year, semi-annually or annually, to you (or anyone you designate) from
your account.
NOTE: If you are withdrawing more shares than your account receives in
dividends, you will be decreasing your total shares owned, which will reduce
your future dividend potential.
INVESTOR PRIVILEGES
The Funds offer the following privileges to shareholders. Additional
information may be obtained by calling NAS toll-free at 1-800-848-0920.
1 NO SALES CHARGE ON REINVESTMENTS--All dividends and capital gains will be
automatically reinvested free of charge in the form of additional shares within
the same Fund and class or another specifically requested Fund (but the same
class) unless you have chosen to receive them in cash on your application.
Unless requested in writing by the shareholder, the Trust will not mail checks
for dividends and capital gains of less than $5 but instead they will
automatically be reinvested in the form of additional shares, and you will
receive a confirmation.
2 EXCHANGE PRIVILEGE--The exchange privilege is a convenient way to exchange
shares from one Fund to another Fund in order to respond to changes in your
goals or in market conditions. HOWEVER, AN EXCHANGE IS A SALE AND PURCHASE OF
SHARES AND, FOR FEDERAL AND STATE INCOME TAX PURPOSES, MAY RESULT IN A CAPITAL
GAIN OR LOSS. The registration of the account to which you are making an
exchange must be exactly the same as that of the Fund account from which the
exchange is made, and the amount you exchange must meet the applicable minimum
investment of the Fund being purchased.
EXCHANGES AMONG FUNDS
Exchanges may be made among any of the Funds within the same class or
among any class in any of the Funds and Prime Shares of the Nationwide Money
Market Fund. For certain exchanges of Class A shares among the Funds, you may
pay the difference between the sales charges, if a higher sales charge is
applicable. Exchanges within Service Class or Institutional Class shares may be
made without incurring a sales charge.
An exchange from the Prime Shares of the Nationwide Money Market Fund
into another Fund will be subject to the applicable sales charge unless already
paid.
There is no administrative fee or exchange fee. The Trust reserves the
right to reject any exchange request it believes will result in excessive
transaction costs, or otherwise adversely affect other shareholders. The Trust
reserves the right to change the exchange privilege upon at least 60 days'
written notice to shareholders.
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<PAGE> 117
EXCHANGES MAY BE MADE FOUR CONVENIENT WAYS:
BY TELEPHONE
NAS NOW--You can automatically process exchanges by calling
1-800-637-0012, 24 hours a day, seven days a week. However, if you
declined the option in the application, you will not have this
automatic exchange privilege. NAS NOW also gives you quick, easy access
to mutual fund information. Select from a menu of choices to conduct
transactions and hear fund price information, mailing and wiring
instructions as well as other mutual fund information. You must call
our toll-free number by the Valuation Time to receive that day's
closing share price. See "VALUATION OF SHARES" above information as to
when a Fund's Valuation Time is.
CUSTOMER SERVICE LINE--By calling 1-800-848-0920, you may exchange
shares by telephone. Requests may be made only by the account owner(s).
You must call our toll-free number by the Valuation Time to receive
that day's closing share price.
NAS may record all instructions to exchange shares. NAS reserves the
right at any time without prior notice to suspend, limit or terminate
the telephone exchange privilege or its use in any manner by any person
or class.
The Funds will employ the same procedure described under "Buying,
Selling and Exchanging Fund Shares" in the Prospectus to confirm that
the instructions are genuine.
The Funds will not be liable for any loss, injury, damage, or expense
as a result of acting upon instructions communicated by telephone
reasonably believed to be genuine, and the Funds will be held harmless
from any loss, claims or liability arising from its compliance with
such instructions. These options are subject to the terms and
conditions set forth in the Prospectus and all telephone transaction
calls may be tape recorded. The Funds reserve the right to revoke this
privilege at any time without notice to shareholders and request the
redemption in writing, signed by all shareholders.
BY MAIL OR FAX-- Write or fax to Nationwide Advisory Services, Inc., Three
Nationwide Plaza, P.O. Box 1492, Columbus, Ohio 43216-1492 or FAX (614)
249-8705. Please be sure that your letter or facsimile is signed exactly as your
account is registered and that your account number and the Fund from which you
wish to make the exchange are included. For example, if your account is
registered "John Doe and Mary Doe", "Joint Tenants With Right of Survivorship,'
then both John and Mary must sign the exchange request. The exchange will be
processed effective the date the signed letter or fax is received. Fax requests
received after 4 P.M. Eastern Time will be processed as of the next business
day. NAS reserves the right to require the original document if you use the fax
method.
BY ONLINE ACCESS--You may use your personal computer to access on-line
trading of the Funds' shares at our website (www.nationwidefunds.com). To
establish this service you must first register through the website. We will then
send to you, by mail, an account access password that will enable you to make
transactions. When you click on one of the Fund's icons, you will be prompted to
enter
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your trading password so that the Fund can be sure each exchange is secure. For
your own protection, only you or your co-account holder(s) should place orders
through your Fund account. When you purchase shares you will be asked to provide
your e-mail address and affirm that you have read the Prospectus. The Fund's
Prospectus is readily available for viewing on the website. The Funds may
terminate the ability to buy Fund shares on its website at any time, in which
case you may continue to exchange shares by mail, wire or telephone pursuant to
the Prospectus.
3 NO SALES CHARGE ON A REPURCHASE--If you redeem all or part of your Class A
shares on which you paid a front-end sales charge, you have a one-time privilege
to reinvest all or part of the redemption proceeds in any shares of the same
class, without a sales charge, within 30 days after the effective date of the
redemption.
If you realize a gain on your redemption, the transaction is taxable,
and reinvestment will not alter any capital gains tax payable. If you realize a
loss and you use the reinstatement privilege, some or all of the loss will not
be allowed as a tax deduction depending upon the amount reinvested.
INVESTOR SERVICES
1 NAS NOW AUTOMATED VOICE RESPONSE SYSTEM--Our toll-free number 1-800-637-0012
will connect you 24 hours a day, seven days a week to NAS NOW. Through a
selection of menu options, you can conduct transactions, hear fund price
information, mailing and wiring instructions and other mutual fund information.
2 TOLL-FREE INFORMATION AND ASSISTANCE--Customer service representatives are
available to answer questions regarding the Funds and your account(s) between
the hours of 8 A.M. and 5 P.M. Eastern Time. Call toll-free:
1-800-848-0920 or contact NAS at our FAX telephone number (614) 249-8705.
3 RETIREMENT PLANS --Shares of the Funds may be purchased for Self-Employed
Retirement Plans, Individual Retirement Accounts (IRAs), Roth IRAs, Educational
IRAs, Simplified Employee Pension Plans, Corporate Pension Plans, Profit Sharing
Plans and Money Purchase Plans. For a free information kit, call 1-800-848-0920.
4 SHAREHOLDER CONFIRMATIONS--You will receive a confirmation statement each time
a requested transaction is processed. However, no confirmations are mailed on
certain pre-authorized, systematic transactions. Instead, these will appear on
your next consolidated statement.
5 CONSOLIDATED STATEMENTS--Shareholders of the Funds receive statements as of
the end of [March, June, September and December]. Please review your statement
carefully and notify us immediately if there is a discrepancy or error in your
account.
For shareholders with multiple accounts, your consolidated statement
will reflect all your current holdings in the Funds. Your accounts are
consolidated by social security number and zip code. Accounts in your household
under other social security numbers may be added to your statement at your
request. Depending on which Funds you own, your consolidated statement will be
sent either
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monthly or quarterly. Only transactions during the reporting period will be
reflected on the statements. An annual summary statement reflecting all
calendar-year transactions in all your Funds will be sent after year-end.
6 AVERAGE COST STATEMENT--This statement may aid you in preparing your tax
return and in reporting capital gains and losses to the IRS. If you redeemed any
shares during the calendar year, a statement reflecting your taxable gain or
loss for the calendar year (based on the average cost you paid for the redeemed
shares) will be mailed to you following each year-end. Average cost can only be
calculated on accounts opened on or after January 1, 1984. Fiduciary accounts
and accounts with shares acquired by gift, inheritance, transfer, or by any
means other than a purchase cannot be calculated.
Average cost is one of the IRS approved methods available to compute
gains or losses. You may wish to consult a tax advisor on the other methods
available. The average cost information will not be provided to the IRS. If you
have any questions, contact one of our service representatives at
1-800-848-0920.
7 SHAREHOLDER REPORTS--All shareholders will receive reports semi-annually
detailing the financial operations of the funds.
8 PROSPECTUSES--Updated prospectuses will be mailed to you annually.
9 UNDELIVERABLE MAIL--If mail from NAS to a shareholder is returned as
undeliverable on three or more consecutive occasions, NAS will not send any
future mail to the shareholder unless it receives notification of a correct
mailing address for the shareholder. Any dividends that would be payable by
check to such shareholders will be reinvested in the shareholder's account until
NAS receives notification of the shareholder's correct mailing address.
FUND PERFORMANCE ADVERTISING
CALCULATING YIELD AND TOTAL RETURN
The Funds may from time to time advertise historical performance,
subject to Rule 482 under the Securities Act. An investor should keep in mind
that any return or yield quoted represents past performance and is not a
guarantee of future results. The investment return and principal value of
investments will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
All performance advertisements shall include average annual (compound)
total return quotations for the most recent one, five, and ten-year periods (or
life if a Fund has been in operation less than one of the prescribed periods).
Average annual (compound) total return represents redeemable value at the end of
the quoted period. It is calculated in a uniform manner by dividing the ending
redeemable value of a hypothetical initial payment of $1,000 minus the maximum
sales charge, for a specified period of time, by the amount of the initial
payment, assuming reinvestment of all dividends and distributions. In
calculating the standard total returns for Class A shares, the current maximum
applicable sales charge is deducted from the initial investment. The one, five,
and
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ten-year periods are calculated based on periods that end on the last day of the
calendar quarter preceding the date on which an advertisement is submitted for
publication.
Standardized yield and total return quotations will be compared
separately for each Class of shares. Because of differences in the fees and/or
expenses borne by Class A, Class B, Service Class and Institutional Class shares
of the Funds, the net yields and total returns on Class A, Class B, Service
Class and Institutional Class shares can be expected, at any given time, to
differ from class to class for the same period.
Each of the Funds, other than the ___________ Fund, may also from time
to time advertise a uniformly calculated yield quotation. This yield is
calculated by dividing the net investment income per share earned during a
30-day base period by the maximum offering price per share on the last day of
the period, assuming reinvestment of all dividends and distributions. This yield
formula uses the average number of shares entitled to receive dividends,
provides for semi-annual compounding of interest, and includes a modified market
value method for determining amortization. The yield will fluctuate, and there
is no assurance that the yield quoted on any given occasion will remain in
effect for any period of time. The effect of sales charges are not reflected in
the calculation of the yields, therefore, a shareholders actual yield may be
less.
NONSTANDARD RETURNS
The Funds may also choose to show nonstandard returns including total
return, and simple average total return. Nonstandard returns may or may not
reflect reinvestment of all dividends and capital gains; in addition, sales
charge assumptions will vary. Sales charge percentages decrease as amounts
invested increase as outlined in the prospectus; therefore, returns increase as
sales charges decrease.
Total return represents the cumulative percentage change in the value
of an investment over time, calculated by subtracting the initial investment
from the redeemable value and dividing the result by the amount of the initial
investment. The simple average total return is calculated by dividing total
return by the number of years in the period, and unlike average annual
(compound) total return, does not reflect compounding.
RANKINGS AND RATINGS IN FINANCIAL PUBLICATIONS
The Funds may report their performance relative to other mutual funds
or investments. The performance comparisons are made to: other mutual funds with
similar objectives; other mutual funds with different objectives; or, to other
sectors of the economy. Other investments which the Funds may be compared to
include, but are not limited to: precious metals; real estate; stocks and bonds;
closed-end funds; market indexes; fixed-rate, insured bank CDs, bank money
market deposit accounts and passbook savings; and the Consumer Price Index.
Normally these rankings and ratings are published by independent
tracking services and publications of general interest including, but not
limited to: Lipper Analytical Services, Inc., CDA/Wiesenberger, Morningstar,
Donoghue's, Schabaker Investment Management, Kanon Bloch Carre & Co.; magazines
such as Money, Fortune, Forbes, Kiplinger's Personal Finance Magazine,
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Smart Money, Mutual Funds, Worth, Financial World, Consumer Reports, Business
Week, Time, Newsweek, U.S. News and World Report; and other publications such as
the Wall Street Journal, Barron's, Columbus Dispatch, Investor's Business Daily,
and Standard & Poor's Outlook.
The rankings may or may not include the effects of sales charges.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES
The Trust presently offers the following series of shares of beneficial
interest, without par value and with the various classes listed; eight of these
series are the Funds:
<TABLE>
<CAPTION>
Series Share Classes
- ------ -------------
<S> <C>
Nationwide Mid Cap Growth Fund Class A, Class B, Class D
Nationwide Growth Fund Class A, Class B, Class D
Nationwide Fund Class A, Class B, Class D
Nationwide Bond Fund Class A, Class B, Class D
Nationwide Tax-Free Income Fund Class A, Class B, Class D
Nationwide Long-Term U.S. Government Bond Fund Class A, Class B, Class D
Nationwide Intermediate U.S. Government Bond Fund Class A, Class B, Class D
Nationwide Money Market Fund Class R, Prime Shares
Nationwide S&P 500 Index Fund Class R, Class Y,
Local Fund Shares
Morley Capital Accumulation Fund ISC Shares, IC Shares,
IRA Shares
Prestige Large Cap Value Fund Class A, Class B, Class Y
Prestige Large Cap Growth Fund Class A, Class B, Class Y
Prestige Small Cap Fund Class A, Class B, Class Y
Prestige Balanced Fund Class A, Class B, Class Y
Prestige International Fund Class A, Class B, Class Y
Nationwide Small Cap Index Fund Class A, Class B,
Institutional Class
Nationwide Mid Cap Index Fund II Class A, Class B,
Institutional Class
Nationwide International Index Fund Class A, Class B,
Institutional Class
Nationwide Bond Index Fund Class A, Class B,
Institutional Class
The Aggressive Fund Class A, Class B, Service Class
The Moderately Aggressive Fund Class A, Class B, Service Class
The Moderate Fund Class A, Class B, Service Class
The Moderately Conservative Fund Class A, Class B, Service Class
The Conservative Fund Class A, Class B, Service Class
</TABLE>
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<TABLE>
<S> <C>
Nationwide Focus Fund Class A, Class B,
Institutional Class
Nationwide Small Cap Value Fund II Class A, Class B,
Institutional Class
Nationwide High Yield Bond Fund Class A, Class B,
Institutional Class
Morley Enhanced Income Fund Class A, Class Y,
Institutional Class
</TABLE>
You have an interest only in the assets of the shares of the Fund which
you own. Shares of a particular class are equal in all respects to the other
shares of that class. In the event of liquidation of a Fund, shares of the same
class will share pro rata in the distribution of the net assets of such Fund
with all other shares of that class. All shares are without par value and when
issued and paid for, are fully paid and nonassessable by the Trust. Shares may
be exchanged or converted as described in this Statement of Additional
Information and in the Prospectus but will have no other preference, conversion,
exchange or preemptive rights.
VOTING RIGHTS
Shareholders of each class of shares have one vote for each share held
and a proportionate fractional vote for any fractional share held. An annual or
special meeting of shareholders to conduct necessary business is not required by
the Declaration of Trust, the 1940 Act or other authority except, under certain
circumstances, to amend the Declaration of Trust, the Investment Advisory
Agreement, fundamental investment objectives, investment policies, investment
restrictions, to elect and remove Trustees, to reorganize the Trust or any
series or class thereof and to act upon certain other business matters. In
regard to termination, sale of assets, the change of fundamental investment
objectives, policies and restrictions or the approval of an Investment Advisory
Agreement, the right to vote is limited to the holders of shares of the
particular fund affected by the proposal. In addition, holders of Class A shares
or Service Class shares will vote as a class and not with holders of any other
class with respect to the approval of the Distribution Plan.
To the extent that such a meeting is not required, the Trust does not
intend to have an annual or special meeting of shareholders. The Trust has
represented to the Commission that the Trustees will call a special meeting of
shareholders for purposes of considering the removal of one or more Trustees
upon written request therefor from shareholders holding not less than 10% of the
outstanding votes of the Trust and the Trust will assist in communicating with
other shareholders as required by Section 16(c) of the 1940 Act. At such
meeting, a quorum of shareholders (constituting a majority of votes attributable
to all outstanding shares of the Trust), by majority vote, has the power to
remove one or more Trustees.
ADDITIONAL GENERAL TAX INFORMATION
Each of the Funds is treated as a separate entity for Federal income
tax purposes and intends to qualify as a "regulated investment company" under
the Code, for so long as such qualification is in the best interest of that
Fund's shareholders. In order to qualify as a regulated investment
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company, a Fund must, among other things: diversify its investments within
certain prescribed limits; derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies. In addition, to utilize the tax provisions specially
applicable to regulated investment companies, a Fund must distribute to its
shareholders at least 90% of its investment company taxable income for the year.
In general, the Fund's investment company taxable income will be its taxable
income subject to certain adjustments and excluding the excess of any net
mid-term or net long-term capital gain for the taxable year over the net
short-term capital loss, if any, for such year.
A non-deductible 4% excise tax is imposed on regulated investment
companies that do not distribute in each calendar year (regardless of whether
they otherwise have a non-calendar taxable year) an amount equal to 98% of their
ordinary income for the calendar year plus 98% of their capital gain net income
for the one-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the next calendar year. If
distributions during a calendar year were less than the required amount, the
Fund would be subject to a non-deductible excise tax equal to 4% of the
deficiency.
Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located, or in which it is otherwise deemed to be conducting business, a Fund
may be subject to the tax laws of such states or localities. In addition, if for
any taxable year a Fund does not qualify for the special tax treatment afforded
regulated investment companies, all of its taxable income will be subject to
federal tax at regular corporate rates (without any deduction for distributions
to its shareholders). In such event, dividend distributions would be taxable to
shareholders to the extent of earnings and profits, and would be eligible for
the dividends received deduction for corporations.
It is expected that each Fund will distribute annually to shareholders
all or substantially all of that Fund's net ordinary income and net realized
capital gains and that such distributed net ordinary income and distributed net
realized capital gains will be taxable income to shareholders for federal income
tax purposes, even if paid in additional shares of that Fund and not in cash.
Distribution by a Fund of the excess of net long-term capital gain over
net short-term capital loss, if any, is taxable to shareholders as long-term
capital gain, respectively, in the year in which it is received, regardless of
how long the shareholder has held the shares. Such distributions are not
eligible for the dividends-received deduction.
Federal taxable income of individuals is subject to graduated tax rates
of 15%, 28%, 31%, 36% and 39.6%. Further, the effective marginal tax rate may be
in excess of 39.6%, because adjustments reduce or eliminate the benefit of the
personal exemption and itemized deductions for individuals with gross income in
excess of certain threshold amounts.
Long-term capital gains of individuals are subject to a maximum tax
rate of 20% (10% for
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individuals in the 15% ordinary income tax bracket). Capital losses may be used
to offset capital gains. In addition, individuals may deduct up to $3,000 of net
capital loss each year to offset ordinary income. Excess net capital loss may be
carried forward and deducted in future years. The holding period for long-term
capital gains is more than one year.
Federal taxable income of corporations in excess of $75,000 up to $10
million is subject to a 34% tax rate; however, because the benefit of lower tax
rates on a corporation's taxable income of less than $75,000 is phased out for
corporations with income in excess of $100,000 but lower than $335,000, a
maximum marginal tax rate of 39% may result. Federal taxable income of
corporations in excess of $10 million is subject to a tax rate of 35%. Further,
a corporation's federal taxable income in excess of $15 million is subject to an
additional tax equal to 3% of taxable income over $15 million, but not more than
$100,000.
Capital gains of corporations are subject to tax at the same rates
applicable to ordinary income. Capital losses may be used only to offset capital
gains and excess net capital loss may be carried back three years and forward
five years.
Certain corporations are entitled to a 70% dividends received deduction
for distributions from certain domestic corporations. Each Fund will designate
the portion of any distributions which qualify for the 70% dividends received
deduction. The amount so designated may not exceed the amount received by that
Fund for its taxable year that qualifies for the dividends received deduction.
[Because all of the Bond Index Fund's net investment income is expected to be
derived from earned interest and short term capital gains, it is anticipated
that no distributions from such Fund will qualify for the 70% dividends received
deduction.]
Foreign taxes may be imposed on a Fund by foreign countries with
respect to its income from foreign securities. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. It is
impossible to determine the effective rate of foreign tax in advance since the
amount of each Fund's assets to be invested in various countries is not known.
If less than 50% in value of any Fund's total assets at the end of its
fiscal year are invested in stocks or securities of foreign corporations, such
Fund will not be entitled under the Code to pass through to its Shareholders
their pro rata share of the foreign taxes paid by that Fund. These taxes will be
taken as a deduction by the Fund. Under Section 1256 of the Code, gain or loss
realized by a Fund from certain financial futures and options transactions will
be treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. Gain or loss will arise upon exercise or lapse of such futures and
options as well as from closing transactions. In addition, any such futures and
options remaining unexercised at the end of a Fund's taxable year will be
treated as sold for their then fair market value, resulting in additional gain
or loss to such Fund characterized in the manner described above.
If more than 50% of the value of a Fund's total assets at the close of
its taxable year consists of the stock or securities of foreign corporations,
the Fund may elect to "pass through" to its shareholders the amount of foreign
income taxes paid by the Fund. Pursuant to such election, shareholders would be
required (i) to include in gross income, even though not actually received,
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their respective pro rata share of the foreign taxes paid by the Fund, (ii) to
treat their income from the Fund as being from foreign sources to the extent
that the Fund's income is from foreign sources, and (iii) to either deduct their
pro rata share of foreign taxes in computing their taxable income or use it as a
foreign tax credit against federal income (but not both). No deduction for
foreign taxes could be claimed by a shareholder who does not itemize deductions.
It is anticipated that the International Fund will be operated so as to
meet the requirements of the Code to "pass through" to its shareholders credits
for foreign taxes paid, although there can be no assurance that these
requirements will be met. Each shareholder will be notified within 45 days after
the close of the International Fund's taxable year whether the foreign taxes
paid by the International Fund will "pass through" for that year and, if so, the
amount of each shareholder's pro rata share of (i) the foreign taxes paid, and
(ii) the International Fund's gross income from foreign sources. Of course,
shareholders who are not liable for federal income taxes, such as retirement
plans qualified under Section 401 of the Code, will not be affected by any such
"pass through" of foreign tax credits.
If a Fund invests in an entity that is classified as a "passive foreign
investment company" ("PFIC") for federal income tax purposes, the operation of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. In addition, gain realized from the
sale, other disposition, or marking-to-market of PFIC securities may be treated
as ordinary income under Section 1291 or Section 1296 of the Code.
Offsetting positions held by a Fund involving certain futures contracts
or options transactions may be considered, for tax purposes, to constitute
"straddles." Straddles are defined to include "offsetting positions" in actively
traded personal property. The tax treatment of straddles is governed by Sections
1092 and 1258 of the Code, which, in certain circumstances, overrides or
modifies the provisions of Section 1256. As such, all or a portion of any short
or long-term capital gain from certain straddle and/or conversion transactions
may be recharacterized as ordinary income.
If a Fund were treated as entering into straddles by reason of its
engaging in futures or options transactions, such straddles would be
characterized as "mixed straddles" if the futures or options comprising a part
of such straddles were governed by Section 1256 of the Code. A Fund may make one
or more elections with respect to mixed straddles. If no election is made, to
the extent the straddle rules apply to positions established by a Fund, losses
realized by such Fund will be deferred to the extent of unrealized gain in any
offsetting positions. Moreover, as a result of the straddle and conversion
transaction rules, short-term capital losses on straddle positions may be
recharacterized as long-term capital losses and long-term capital gains may be
recharacterized as short-term capital gain or ordinary income.
Investment by a Fund in securities issued at a discount or providing
for deferred interest or for payment of interest in the form of additional
obligations could, under special tax rules, affect the amount, timing and
character of distributions to Shareholders. For example, a Fund could be
required to take into account annually a portion of the discount (or deemed
discount) at which such securities were issued and to distribute such portion in
order to maintain its qualification as a regulated investment company. In that
case, that Fund may have to dispose of securities which it
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might otherwise have continued to hold in order to generate cash to satisfy
these distribution requirements.
Each Fund may be required by federal law to withhold and remit to the
U.S. Treasury 31% of taxable dividends, if any, and capital gain distributions
to any Shareholder, and the proceeds of redemption or the values of any
exchanges of Shares of the Fund, if such Shareholder (1) fails to furnish the
Fund with a correct taxpayer identification number, (2) under-reports dividend
or interest income, or (3) fails to certify to the Fund that he or she is not
subject to such withholding. An individual's taxpayer identification number is
his or her Social Security number.
Information set forth in the Prospectuses and this Statement of
Additional Information which relates to Federal taxation is only a summary of
some of the important Federal tax considerations generally affecting purchasers
of shares of the Funds. No attempt has been made to present a detailed
explanation of the Federal income tax treatment of the Funds or their
shareholders and this discussion is not intended as a substitute for careful tax
planning. Accordingly, potential purchasers of shares of a Fund are urged to
consult their tax advisers with specific reference to their own tax situation.
In addition, the tax discussion in the Prospectus and this Statement of
Additional Information is based on tax laws and regulations which are in effect
on the date of the prospectuses and this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action.
Information as to the federal income tax status of all distributions
will be mailed annually to each shareholder.
MAJOR SHAREHOLDERS
As of December ____, 1999, there were no outstanding shares of the
Funds. Immediately prior to the public offering of shares of the Funds, ____
owned all of the issued and outstanding shares of each Fund. It is anticipated
that upon the public offering of shares of the Funds, NAS' holdings will be
reduced below 5% of the outstanding shares of each Fund.
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APPENDIX A
BOND RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished by
the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
INVESTMENT GRADE
AAA - Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
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BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. 'BB' indicates the least degree of speculation and 'C' the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB - Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B - Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC - Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
CC - Debt rated 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C - Debt rated 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI - The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D - Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grade period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
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MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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FITCH IBCA INFORMATION SERVICES, INC. BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in determining
the credit risk associated with a particular security. The ratings represent
Fitch's assessment of the issuer's ability to meet the obligations of a specific
debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and represent the
lowest expectation of credit risk. The obligor has an
exceptionally strong capacity for timely payment of financial
commitments, a capacity that is highly unlikely to be
adversely affected by foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. This rating indicates a very strong capacity
for timely payment of financial commitments, a capacity that
is not significantly vulnerable to foreseeable events.
A Bonds considered to be investment grade and represent a low
expectation of credit risk. This rating indicates a strong
capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to changes in
economic conditions or circumstances than long term debt with
higher ratings.
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BBB Bonds considered to be in the lowest investment grade and
indicates that there is currently low expectation of credit
risk. The capacity for timely payment of financial commitments
is considered adequate, but adverse changes in economic
conditions and circumstances are more likely to impair this
capacity.
BB Bonds are considered speculative. This rating indicates that
there is a possibility of credit risk developing, particularly
as the result of adverse economic changes over time; however,
business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this
category are not investment grade.
B Bonds are considered highly speculative. This rating indicates
that significant credit risk is present, but a limited margin
of safety remains. Financial commitments are currently being
met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC Bonds are considered a high default risk. Default is a real
and C possibility Capacity for meeting financial commitments is
solely reliant upon sustained, favorable business or economic
developments. A `CC' rating indicates that default of some
kind appears probable. `C' rating signal imminent default.
DDD, DD Bonds are in default. Such bonds are not meeting current
and D obligations and are extremely speculative. `DDD' designates
the highest potential for recovery of amounts outstanding on
any securities involved and 'D' represents the lowest
potential for recovery.
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term fundamental
quality. Rating determination is based on qualitative and quantitative factors
which may vary according to the basic economic and financial characteristics of
each industry and each issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such factors as competition,
government action, regulation, technological obsolescence, demand shifts, cost
structure, and management depth and expertise. The projected viability of the
obligor at the trough of the cycle is a critical determination.
Each rating also takes into account the legal form of the security, (e.g., first
mortgage bonds, subordinated debt, preferred stock, etc.). The extent of rating
dispersion among the various classes of securities is determined by several
factors including relative weightings of the different security classes in the
capital structure, the overall credit strength of the issuer, and the nature of
covenant protection. Review of indenture restrictions is important to the
analysis of a company's operating and
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financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter (more
frequently, if necessary). Ratings of 'BBB-' and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities.
RATING SCALE DEFINITION
- ------------ ----------
AAA Highest credit quality. The risk factors are
negligible, being only slightly more than
for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are
AA strong. Risk is modest, but may vary slightly
AA- from time to time because of economic conditions.
A+ Protection factors are average but adequate.
A However, risk factors are more variable and
A- greater in periods of economic stress.
BBB+ Below average protection factors but still
BBB considered sufficient for prudent
BBB- investment. Considerable variability in risk
during economic cycles.
BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective
BB- financial protection factors fluctuate according to
industry conditions or company fortunes. Overall
quality may move up or down frequently within this category.
B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
B- protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the
rating within this category or into a higher
or lower rating grade.
CCC Well below investment grade securities.
Considerable uncertainty exists as to timely
payment of principal, interest or preferred
dividends. Protection factors are narrow and
risk can be substantial with unfavorable
economic/industry conditions, and/or with
unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to
meet scheduled principal and/or interest
payments.
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DP Preferred stock with dividend arrearages.
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from 'A-1' for the highest
quality obligations to 'D' for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with doubtful capacity
for payment.
D Debt rated 'D' is in payment default. the 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grade period.
STANDARD & POOR'S NOTE RATINGS
An S&P note rating reflects the liquidity factors and market-access risks unique
to notes. Notes maturing in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating.
The following criteria will be used in making the assessment:
1. Amortization schedule - the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note.
2. Source of payment - the more the issue depends on the market for
its refinancing, the
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more likely it is to be considered a note.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
MOODY'S SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions on the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior capacity for
repayment of senior short-term debt obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics: (I) leading market
positions in well established industries, (II) high rates of return on funds
employed, (III) conservative capitalization structures with moderate reliance on
debt and ample asset protection, (IV) broad margins in earnings coverage of
fixed financial charges and high internal cash generation, and (V) well
established access to a range of financial markets and assured sources of
alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable capacity
for repayment of short-term promissory obligations. The effect of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating categories.
MOODY'S NOTE RATINGS
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by
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established cash flows, superior liquidity support or demonstrated broad based
access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+ Exceptionally strong credit quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1 Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment but the margin of
safety is not as great as for issues assigned F-1+ and F-1 ratings.
DUFF & PHELPS SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations with
maturities under one year, including commercial paper, the uninsured portion of
certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.
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<PAGE> 136
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
RATING SCALE DEFINITION
- -----------------------
HIGH GRADE
- ----------
D-1+ Highest certainty of timely payment. short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors
are excellent and supported by good fundamental protection
factors.
Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors.
Risk factors are very small.
GOOD GRADE
----------
D-2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.
SATISFACTORY GRADE
------------------
D-3 Satisfactory liquidity and other protection factors
qualify issue as to investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment
is expected.
NON-INVESTMENT GRADE
--------------------
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DEFAULT
-------
D-5 Issuer failed to meet scheduled principal and/or interest
85
<PAGE> 137
payments.
THOMSON'S SHORT-TERM RATINGS
The Thomson Short-Term Ratings apply, unless otherwise noted, to specific debt
instruments of the rated entities with a maturity of one year or less. Thomson
short-term ratings are intended to assess the likelihood of an untimely or
incomplete payments of principal or interest.
TBW-1 the highest category, indicates a very high likelihood that principal and
interest will be paid on a timely basis.
TBW-2 the second highest category, while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1".
TBW-3 the lowest investment-grade category; indicates that while the obligation
is more susceptible to adverse developments (both internal and external) than
those with higher ratings, the capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4 the lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
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<PAGE> 138
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Amended Declaration of Trust previously filed with the Trust's
Registration Statement on January 5, 1999, and is hereby incorporated
by reference.
(b) Amended Bylaws previously filed with the Trust's Registration
Statement on August 7, 1998, and is hereby incorporated by reference.
(c) Certificates for shares are not issued. Articles V, VI, VII, and VIII
of the Declaration of Trust, incorporated by reference to Exhibit (1)
hereto, define rights of holders of shares.
(d)(1)(a) Investment Advisory Agreement (except for the Morley Capital
Accumulation Fund) previously filed with the Trust's Registration
Statement on January 5, 1999, and is hereby incorporated by reference.
(b) Amendment to Investment Advisory Agreement.
(c) Proposed Amended Exhibit A to the Investment Advisory Agreement.
(2)(a) Investment Advisory Agreement for the Morley Capital Accumulation Fund
previously filed with the Trust's Registration Statement on January 5,
1999, and is hereby incorporated by reference.
(b) Proposed Amended Exhibit A to the Investment Advisory Agreement for
the Morley Capital Accumulation Fund and the Morley Enhanced Income
Fund.
(3) Subadvisory Agreements.
(a)Subadvisory Agreement with Fund Asset Management, L.P. for
S & P 500 Index Fund report for October 29,1999, previously
filed with the Trust's Registration Statement on October 29,
1999, and is hereby incorporated by reference.
(b)(1) Subadvisory Agreement for the Prestige Large Cap Value Fund
January 5, 1999, and is hereby incorporated by reference.
(2) Amendment to Subadvisory Agreement.
(c)(1) Subadvisory Agreement for the Prestige Large Cap Growth Fund
previously filed with the Trust's Registration Statement on
January 5, 1999, and is hereby incorporated by reference.
(2) Amendment to Subadvisory Agreement.
(d)(1) Subadvisory Agreement for the Prestige Small Cap Fund
previously filed with the Trust's Registration Statement on
January 5, 1999, and is hereby incorporated by reference.
(2) Amendment to Subadvisory Agreement.
(e)(1) Subadvisory Agreement for the Prestige International Fund
previously filed with the Trust's Registration Statement on
January 5, 1999, and is hereby incorporated by reference.
(2) Amendment to Subadvisory Agreement.
(f)(1) Subadvisory Agreement for the Prestige Balanced Fund
previously filed with the Trust's Registration Statement on
January 5, 1999, and is hereby incorporated by reference.
(2) Amendment to Subadvisory Agreement.
(e)(1) Underwriting Agreement previously filed with the Trust's Registration
Statement on January 5, 1999, and is hereby incorporated by reference.
(2) Model Dealer Agreement previously filed with the Trust's Registration
Statement on January 5, 1999, and is hereby incorporated by reference.
(f) Not applicable.
(g) Custody Agreement previously filed with the Trust's original
Registration Statement on November 18, 1997, and is hereby incorporated
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by reference.
(h)(1)(a) Fund Administration Agreement previously filed with the Trust's
Registration Statement on January 5, 1999, and is hereby incorporated
by reference.
(b) Amendment to Fund Administration Agreement.
(c) Proposed Amended Exhibit A to Fund Administration Agreement.
(2) Transfer and Dividend Disbursing Agent. previously filed with the
Trust's Registration Statement on January 5, 1999, and is hereby
incorporated by reference.
(3) Agreement and Plan of Reorganization between Nationwide Investing
Foundation and the Trust previously filed with the Trust's
Registration Statement on form N-14 ('33 Act File No. 333-41175) on
November 24, 1997, and is hereby incorporated by reference.
(4) Agreement and Plan of Reorganization between Nationwide Investing
Foundation II and the Trust Previously filed with the Trust's
Registration Statement on Form N-14 ('33 Act File No.333-41175) on
November 24, 1997, and is hereby incorporated by reference.
(5) Agreement and Plan of Reorganization between Financial Horizons
Investment Trust and the Trust previously filed with the Trust's
Registration Statement on Form N-14 ('33 Act File No. 333-41175) on
November 24, 1997 and is hereby incorporated by reference.
(6) Administrative Services Plan and Services Agreement previously filed
on January 5, 1999, and is hereby incorporated by reference.
(i) Opinion of Counsel previously filed and is hereby incorporated by
reference.
(j) Consent of KPMG LLP, Independent Auditors- to be filed by post
effective amendment.
(k) Not applicable.
(l) Purchase Agreement previously filed with Trust's Registration
Statement on January 2, 1998, and hereby incorporated by reference.
(m)(1) Amended Distribution Plan previously filed with the Trust's
Registration Statement on January 5, 1999, and is hereby incorporated
by reference.
(2) Dealer Agreement (see Exhibit 6(b)) previously filed with the Trust's
Registration Statement on January 5, 1999, and is hereby incorporated
by reference.
(3) Rule 12b-1 Agreement previously filed with the Trust's Registration
Statement on January 5, 1999, and is hereby incorporated by reference.
(n) Financial Data Schedule- to be filed by post-effective amendment.
(o) Amended 18f-3 Plan previously filed with the Trust's Registration
Statement on January 5, 1999, and is hereby incorporated by reference.
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Power of Attorney dated November 7, 1997 previously filed in the Trust's
Pre-Effective Amendment and is hereby incorporated by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH REGISTRANT
No person is presently controlled by or under common control with
Registrant.
ITEM 25. INDEMNIFICATION
Indemnification provisions for officers, directors and employees of
Registrant are set forth in Article V, Section 5.2 of the Declaration
of Trust. In addition, Section 1743.13 of the Ohio Revised Code
provides that no liability to third persons for any act, omission or
obligation shall attach to the trustees, officers, employees or
agents of a business trust organized under Ohio statutes. The
trustees are also covered by an errors and omissions policy provided
by the Trust covering actions taken by the trustees in their capacity
as trustee. See Item 24(b)1 above.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Villanova Mutual Fund Capital Trust, ("VMF"), the investment
adviser of the Trust, also serves as investment adviser to the
Nationwide Separate Account Trust.
The Directors of Villanova Capital, Inc., VMF's managing unitholder
and the officers of VMF are as follows:
Joseph J. Gasper Director and President and Chief Operating Officer
--------------------------------------------------
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance
Company
Nationwide Financial Services, Inc.
Director and Chairman of the Board
----------------------------------
National Deferred Compensation, Inc.
Nationwide Investment Services Corp
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Director and Vice Chairman
--------------------------
ALLIED Group Merchant Banking Corp
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
Nationwide Financial Institution
Distributors Agency, Inc.
Nationwide Global Funds
Nationwide Global Holdings, Inc.
Nationwide Retirement Solutions, Inc.
Neckura Life Insurance Company
NFS Distributors, Inc.
Pension Associates, Inc.
Villanova Capital, Inc.
Vice Chairman
-------------
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Director and President
----------------------
Employers Life Insurance Company of
Wausau
Nationwide Advisory Services, Inc.
Nationwide Investor Services, Inc.
Nationwide Financial Services (Bermuda)
Ltd.
Wausau Preferred Health Insurance
Company
Director
--------
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
Financial Horizons Distributors Agency
Of Alabama, Inc.
Financial Horizons Distributors Agency
of Ohio, Inc.
Financial Horizons Distributors Agency
of Oklahoma, Inc.
Financial Horizons Securities,
Corp.,Inc
Landmark Financial Services of New
York,
Leben Direkt Insurance Company
Morley Financial Services, Inc.
Nationwide Indemnity Company
Neckura Holding Company
NGH Luxembourg, S.A.
PanEurolife
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Trustee and Chairman
--------------------
Nationwide Asset Allocation Trust
Nationwide Separate Account Trust
Trustee and President
---------------------
Nationwide Insurance Golf Charities,
Inc.
Board of Managers
-----------------
Nationwide Services Company, LLC.
Dennis W. Click Vice President and Secretary
------------------------------
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance
Company
Nationwide Property and Casualty
Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity
Insurance Company
Nationwide Financial Services, Inc.
Nationwide Services Company, LLC.
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Nationwide Financial Institution
Distributors Agency, Inc.
Nationwide International Underwriters
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group, Inc.
ALLIED Group Insurance Marketing Company
ALLIED Group Mortgage Company
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
ALLIED Property and Casualty Insurance
Company
AMCO Insurance Company
American Marine Underwriters, Inc.
Cal-Ag Insurance Services, Inc.
CalFarm Insurance Agency
CalFarm Insurance Company
Colonial County Mutual Insurance Company
Colonial Insurance Company of Wisconsin
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
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Gates McDonald & Company
GatesMcDonald Health Plus Inc.
Gates, McDonald & Company of Nevada
Gates, McDonald & Company of New York,
Inc.
National Casualty Company
National Deferred Compensation, Inc.
Nationwide Global Holdings, Inc.
Nationwide Cash Management Company
Nationwide Indemnity Company
Nationwide Community Urban
Redevelopment Corporation
Nevada Independent Companies-
Construction
Nevada Independent Companies-Health
and Nonprofit
Nevada Independent Companies-Hospitality
and Entertainment
Nevada Independent Companies-
Manufacturing,
Transportation and Distribution
NFS Distributors, Inc.
Farmland Mutual Insurance Company
Lone Star General Agency, Inc.
Nationwide Agribusiness Insurance
Company
Employers Life Insurance Company of
Wausau
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
Nationwide Corporation
Nationwide Insurance Enterprise
Foundation
Nationwide Investment Services
Corporation
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance
Company
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
Financial Horizons Distributors
Agency of Alabama, Inc.
Financial Horizons Distributors
Agency of Ohio, Inc.
Financial Horizons Distributors
Agency of Oklahoma, Inc.
Financial Horizons Securities
Corporation
Landmark Financial Services of New
York, Inc.
Nationwide Retirement Solutions, Inc.
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Nationwide Retirement Solutions, Inc.
of Alabama
Nationwide Retirement Solutions, Inc.
of Arizona
Nationwide Retirement Solutions, Inc.
of Arkansas
Nationwide Retirement Solutions, Inc.
of Montana
Nationwide Retirement Solutions, Inc.
of Nevada
Nationwide Retirement Solutions, Inc.
of New Mexico
Nationwide Retirement Solutions, Inc.
of Ohio
Nationwide Retirement Solutions, Inc.
of Oklahoma
Nationwide Retirement Solutions, Inc.
of South Dakota
Nationwide Retirement Solutions, Inc.
of Wyoming
Nationwide Agency, Inc.
Nationwide Health Plans, Inc.
Nationwide Management Systems, Inc.
MRM Investments, Inc.
National Premium and Benefit
Administration Company
Nationwide Insurance Company of America
Nationwide Insurance Company of Florida
Morley Financial Services, Inc.
Pension Associates, Inc.
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Wausau Preferred Health Insurance
Company
Assistant Secretary
-------------------
Nationwide Financial Services
(Bermuda) Ltd.
Vice President and Assistant Secretary
--------------------------------------
ALLIED Group Merchant Banking
Corporation
Vice President and Clerk
------------------------
Healthcare First, Inc.
Nationwide Retirement Solutions
Insurance Agency, Inc.
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Paul J. Hondros Director
--------
President and Chief Executive Officer
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Dimon R. McFerson Chairman and Chief Executive Officer
Nationwide Insurance
------------------------------------
Enterprise and Director
-----------------------
ALLIED Group, Inc.
ALLIED Life Financial Corporation
Farmland Mutual Insurance Company
GatesMcDonald Health Plus, Inc.
Nationwide Agribusiness Insurance
Company
National Casualty Company
Nationwide Financial Services, Inc.
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance
Company
Chairman and Chief Executive Officer and
Director
----------------------------------------
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty
Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance
Company
Colonial Insurance Company of Wisconsin
National Deferred Compensation, Inc.
Nationwide Cash Management Company
Nationwide Global Holdings, Inc.
Nationwide Indemnity Company
Nationwide Insurance Company of America
Nationwide Investment Services
Corporation
Chairman and Chief Executive Officer,
President and Director
-------------------------------------
Nationwide Corporation
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<PAGE> 146
Chairman of the Board, Chairman and
Chief Executive
-----------------------------------
Officer and Director
--------------------
American Marine Underwriters, Inc.
Employers Life Insurance Company of
Wausau
Nationwide Advisory Services, Inc.
Nationwide Financial Institution
Distributors Agency, Inc
Nationwide International Underwriters
Nationwide Investor Services, Inc.
Nationwide Retirement Solutions, Inc.
NFS Distributors, Inc.
Pension Associates, Inc.
Wausau Preferred Health Insurance
Company
Chairman of the Board, Chairman and
Chief Executive
-----------------------------------
Officer-Nationwide Insurance Enterprise
and Director
---------------------------------------
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group Insurance Marketing Company
ALLIED Group Merchant Banking
Corporation
ALLIED Group Mortgage Company
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Insurance Company
ALLIED Property and Casualty
Insurance Company
AMCO Insurance Company
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Gates, McDonald and Company
Nationwide Retirement Solutions, Inc.
Nationwide Insurance Enterprise
Services, Ltd.
Villanova Capital, Inc.
Trustee and Chairman
--------------------
Financial Horizons Investment Trust
Nationwide Investing Foundation
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Nationwide Investing Foundation II
Nationwide Mutual Funds
Chairman of the Board
---------------------
Nationwide Insurance Golf Charities,
Inc.
Chairman of the Board and Director
----------------------------------
Cal-Ag Insurance Services, Inc.
CalFarm Insurance Agency
CalFarm Insurance Company
Lone Star General Agency, Inc.
Nationwide Community Urban
Redevelopment Corporation
Colonial County Mutual Insurance Company
Director
--------
Gates, McDonald & Company of Nevada
Gates, McDonald & Company of New York
Healthcare First, Inc.
MRM Investments, Inc.
Morley Financial Services, Inc.
Nationwide Agency, Inc.
Nationwide Health Plans, Inc.
Nationwide Management Systems, Inc.
Nevada Independent Companies-
Construction
Nevada Independent Companies-Health
and Nonprofit
Nevada Independent Companies-
Hospitality and Entertainment
Nevada Independent Companies-
Manufacturing,
Transportation and Distribution
PanEurolife
Chairman of the Board, Chairman and
Chief Executive
-----------------------------------
Officer and Trustee
-------------------
Nationwide Insurance Enterprise
Foundation
Member-Board of Managers, Chairman of
the Board,
-------------------------------------
Chairman and Chief Executive Officer
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------------------------------------
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Nationwide Services Company, LLC.
Chairman and Chief Executive Officer
------------------------------------
Nationwide Insurance Company of
Florida
Chairman and Chief Executive Officer-
Nationwide Insurance
-------------------------------------
Enterprise
----------
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Robert A. Oakley
Executive Vice President-Chief Financial
Officer
----------------------------------------
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance
Company
Nationwide General Insurance Company
Nationwide Property and Casualty
Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity
Insurance Company
ALLIED Group. Inc.
ALLIED Life Financial Corporation
CalFarm Insurance Company
Employers Life Insurance Company
of Wausau
National Casualty Company
National Premium and Benefit
Administration Company
Farmland Mutual Insurance Company
Nationwide Financial Institution
Distributors Agency, Inc.
Lone Star General Agency, Inc.
Nationwide Agribusiness Insurance
Company
Nationwide Corporation
Nationwide Financial Services, Inc.
Nationwide Investment Services
Corporation
Nationwide Investor Services, Inc.
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Nationwide Insurance Enterprise
Foundation
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Nationwide Retirement Solutions, Inc.
Colonial County Mutual Insurance
Company
Pension Associates, Inc.
Nationwide Retirement Solutions, Inc.
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance
Company
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Wausau Preferred Health Insurance
Company
Director and Chairman of the Board
----------------------------------
Neckura Holding Company
Neckura Insurance Company
Neckura Life Insurance Company
Executive Vice President-Chief
Financial Officer and
------------------------------
Director
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group Insurance Marketing
Company
ALLIED Group Merchant Banking
Corporation
ALLIED Group Mortgage Company
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Insurance Company
ALLIED Property and Casualty
Insurance Company
AMCO Insurance Company
American Marine Underwriters, Inc.
Cal-Ag Insurance Services, Inc.
CalFarm Insurance Agency
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Colonial Insurance Company of
Wisconsin
Nationwide Cash Management Company
Nationwide Community Urban
Redevelopment Corporation
National Deferred Compensation, Inc.
Nationwide Global Holdings, Inc.
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Nationwide Services Company, LLC.
NFS Distributors, Inc.
MRM Investments, Inc.
Nationwide Advisory Services, Inc.
Nationwide Indemnity Company
Nationwide Insurance Company of
America
Nationwide Insurance Company of
Florida
Nationwide International Underwriters
Villanova Capital, Inc.
Director and Vice Chairman
--------------------------
Leben Direkt Insurance Company
Neckura General Insurance Company
Auto Direkt Insurance Company
Director
--------
Gates, McDonald & Company
GatesMcDonald Health Plus Inc.
Healthcare First, Inc.
Morley Financial Services, Inc.
NGH Luxembourg, S.A.
PanEurolife
Board of Managers, Executive Vice
Pres.-Chief Financial Officer
---------------------------------
Nationwide Insurance Enterprise
Services, Ltd.
Susan A. Wolken
Senior Vice President - Life Company
Operations
------------------------------------
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide Property and Casualty
Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance
Company
Nationwide Financial Services, Inc.
Senior Vice President - Life Company
Operations and Director
------------------------------------
Nationwide Financial Services
(Bermuda) Ltd.
Chairman of the Board and Director
----------------------------------
Nationwide Trust Company, FSB
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Senior Vice President and Director
----------------------------------
Employers Life Insurance Company of
Wausau
Pension Associates, Inc.
Wausau Preferred Health Insurance
Company
Director
--------
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
Financial Horizons Distributors
Agency of Alabama, Inc.
Financial Horizons Distributors
Agency of Ohio, Inc.
Financial Horizons Distributors Agency
of Oklahoma, Inc.
Financial Horizons Securities
Corporation
Landmark Financial Services of New
York, Inc.
Nationwide Advisory Services, Inc.
----------------------------------
Nationwide Financial Institution
Distributors Agency, Inc.
Nationwide Global Funds
Nationwide Investment Services
Corporation
Nationwide Retirement Solutions, Inc.
Nationwide Retirement Solutions
Insurance Agency, Inc.
Nationwide Retirement Solutions, Inc.
of Alabama
Nationwide Retirement Solutions, Inc.
of Arizona
Nationwide Retirement Solutions, Inc.
of Arkansas
Nationwide Retirement Solutions, Inc.
of Montana
Nationwide Retirement Solutions, Inc.
of Nevada
Nationwide Retirement Solutions, Inc.
of New Mexico
Nationwide Retirement Solutions, Inc.
of Ohio
Nationwide Retirement Solutions, Inc.
of Oklahoma
Nationwide Retirement Solutions, Inc.
of South Dakota
Nationwide Retirement Solutions, Inc.
of Wyoming
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Villanova Capital, Inc.
Robert J. Woodward, Jr. Executive Vice President-Chief
Investment Officer
------------------------------
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance
Company
Nationwide General Insurance
Company
Nationwide Property and Casualty
Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance
Company
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group, Inc.
ALLIED Group Insurance Marketing
Company
ALLIED Group Merchant Banking Corp.
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
ALLIED Property and Casualty
Insurance Company
AMCO Insurance Company
Cal-Ag Insurance Services, Inc.
CalFarm Insurance Agency
CalFarm Insurance Company
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Colonial County Mutual Insurance
Company
Colonial Insurance Company of Wisconsin
Employers Insurance of Wausau A Mutual
Company
Employers Life Insurance Company of
Wausau
Farmland Mutual Insurance Company
Gates, McDonald & Company
GatesMcDonald Health Plus, Inc.
Lone Star General Agency, Inc.
National Casualty Company
Nationwide Financial Services, Inc.
Nationwide Financial Services (Bermuda)
Ltd.
Nationwide Agribusiness Insurance
Company
Nationwide Insurance Company of
America
Nationwide Insurance Company of Florida
Nationwide Corporation
Nationwide Insurance Enterprise
Foundation
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Nationwide Insurance Enterprise Serv Ltd
Nationwide Investment Services
Corporation
Nationwide Retirement Solutions, Inc.
NFS Distributors, Inc.
Pension Associates, Inc.
Nationwide Retirement Solutions, Inc.
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance
Company
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Wausau Preferred Health Insurance
Company
Director
--------
Healthcare First, Inc.
Morley Financial Services, Inc.
Nationwide Global Holdings, Inc.
Nationwide Investors Services, Inc.
Member-Board of Managers and Vice Chairman
------------------------------------------
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Member-Board of Managers and Executive
Vice President-Chief
-----------------------------------------
Investment Officer
------------------
Nationwide Services Company, LLC.
Director and President
----------------------
MRM Investments, Inc.
Nationwide Cash Management Company
Nationwide Community Urban
Redevelopment Corporation
Director and Executive Vice President-
Chief Investment Officer
----------------------------------------
Gates, McDonald & Company
GatesMcDonald Health Plus, Inc.
National Deferred Compensation, Inc.
Nationwide Indemnity Company
Nationwide Advisory Services, Inc.
Villanova Capital, Inc.
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Director, Vice Chairman and Executive Vice
President-Chief
--------------------------------------
Investment Officer
------------------
ALLIED Group Mortgage Company
Trustee and Vice Chairman
-------------------------
Nationwide Asset Allocation Trust
Nationwide Separate Account Trust
Except as otherwise noted, the principal business address of any company with
which any person specified above is connected in the capacity of director,
officer, employee, partner or trustee is One Nationwide Plaza, Columbus, Ohio
43215, except for the following companies:
Farmland Mutual Insurance Company
Nationwide Agribusiness Insurance Company
1963 Bell Avenue
Des Moines, Iowa 50315-1000
Colonial Insurance Company of Wisconsin
One Nationwide Plaza
Columbus, Ohio 43215
Scottsdale Insurance Company
8877 North Gainey Center Drive
P.O. Box 4110
Scottsdale, Arizona 85261-4110
National Casualty Company
P.O. Box 4110
Scottsdale, Arizona 85261-4110
Lone Star General Agency, Inc.
P.O. Box 14700
Austin, Texas 78761
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Auto Direkt Insurance Company
Columbus Insurance Brokerage and Service, GMBH
Leben Direkt Insurance Company
Neckura Holding Company
Neckura Insurance Company
Neckura Life Insurance Company
John E. Fisher Str. 1
61440 Oberursel/Ts.
Germany
Nationwide Retirement Solutions, Inc.
Two Nationwide Plaza
Columbus, Ohio 43215
Morley Financial Services, Inc.
5665 S. W. Meadows Rd. , Suite 400
Lake Oswego, Oregon 97035
(b) UBT serves as investment adviser to the Morley Capital
Accumulation Fund. UBT, a trust company organized under the laws
of the State of Oregon, is a wholly owned subsidiary of
Nationwide Life Insurance Company. UBT conducts a variety of
trust activities.
To the knowledge of the Trust, none of the directors or officers
of UBT, except as set forth below, is or has been at any time
during the past two fiscal years engaged in any other business,
profession, vocation or employment of a substantial nature,
except that certain directors and officers also hold various
positions with and engage in business for Morley Financial
Services, Inc. The directors except as noted below may be
contacted C/O UBT, 5665 SW Meadows Rd., Suite 400, Lake Oswego,
Oregon 97035.
Donald C. Burdick, 434 Ridgeway Road, Lake Oswego, OR 97034 Mr.
Burdick has been an independent consultant and investor for the
past 10 years. Prior to that he was President of Investcorp
Financial Services.
Harold H. Morley, President, CEO and Director of UBT. Mr. Morley
is Chairman and Chief Executive Officer of Morley Financial
Services, Inc.
Joan K. Hall, Senior Vice President, Corporate Secretary,
Financial Officer and Director of UBT. Ms. Hall is Senior Vice
President and Financial Officer of Morley Financial Services.
Greg E. Ellis, Senior Vice President/ Managing Director. Mr.
Ellis is also Senior Vice President/ Managing Director of Morley
Capital Management, Inc.
C-18
<PAGE> 156
Peter DeGraff, Vice President and Assistant General Manager.
Taylor E. Drake, Vice President.
Frederick F. Fletcher VI, Vice President and Corporate
Controller.
Barbara Salisbury, Vice President.
(c) Information for the Subadviser of the S&P 500 Index Fund
(1) Fund Asset Management, L.P.
Fund Asset Management, L.P. ("FAM") acts as subadviser to
the S&P 500 Index Fund and as adviser or subadviser to a
number of other registered investment companies. The list
required by this Item 28 of officers and directors of FAM,
together with information as to their other business,
profession, vocation or employment of a substantial nature
during the past two fiscal years, is incorporated by
reference to Schedule A and D of Form ADV filed by FAM (SEC
file No. 801-12485).
(d) Information for the Subadviser of the Prestige Large Cap Value
Fund
(1) Brinson Partners, Inc.
Brinson Partners, Inc. ("Brinson") acts as a subadviser to
the Prestige Large Cap Value Fund and as adviser or
subadviser to a number of other registered investment
companies. The list required by this Item 28 of officers
and directors of Brinson, together with information as to
their other business, profession, vocation or employment of
a substantial nature during the past two fiscal years, is
incorporated by reference to Schedule A and D of Form ADV
filed by Brinson (SEC file No. 801-34910.)
(e) Information for the Subadviser of the Prestige Large Cap Growth
Fund
(1) Goldman Sachs Asset Management
Goldman Sachs Asset Management ("Goldman") acts as a
subadviser to the Large Cap Growth Fund and as adviser or
subadviser to a number of other registered investment
companies. The list required by this Item 28 of officers and
C-19
<PAGE> 157
directors of Goldman, together with information as to their
other business, profession, vocation or employment of a
substantial nature during the past two fiscal years, is
incorporated by reference to Schedule A and D of Form ADV
filed by Goldman (SEC file No. 801-16048.)
(f) Information for the Subadviser of the Prestige Balanced Fund
(1) J. P. Morgan Investment Management
J. P. Morgan Investment Management, Inc. ("JPMIM"), a
registered investment adviser, is a wholly owned subsidiary
of J. P. Morgan & Co. Incorporated. JPMIM manages employee
benefit plans for corporations and unions. JPMIM also
provides investment management services for a broad spectrum
of other institutional investors, including foundations,
endowments, sovereign governments, and insurance companies.
To the knowledge of the Registrant, none of the directors or
executive officers of JPMIM is or has been in the past two
fiscal years engaged in any other business or profession,
vocation or employment of a substantial nature, except that
certain officers and directors of JPMIM also hold various
positions with, and engage in business for, J.P. Morgan &
Co. Incorporated or Morgan Guaranty Trust Company of New
York, a New York trust company which is also a wholly owned
subsidiary of J. P. Morgan & Co. Incorporated.
(g) Information for the Subadviser of the Prestige Small Cap Fund
(1) Invesco Management & Research, Inc.
Invesco Management & Research, Inc. ("INVESCO") acts as a
subadviser to the Small Cap Fund and as adviser or
subadviser to a number of other registered investment
companies. The list required by this Item 28 of officers and
directors of INVESCO, together with information as to their
other business, profession, vocation or employment of a
substantial nature during the past two fiscal years, is
incorporated by reference to Schedule A and D of Form ADV
filed by INVESCO (SEC file No. 801-01596.)
(h) Information for the Subadviser of the Prestige International Fund
(1) Lazard Asset Management
Lazard Asset Management ("Lazard") acts as subadviser to the
International Fund and as adviser or subadviser to a number
of other registered investment companies as well as to
separate institutional investors. The list required by this
Item 26 of officers and directors of Lazard, together with
information as to their other business, profession, vocation
or employment of a substantial nature during the past 2
years, is incorporated by reference to Schedules A and D of
Form ADV filed by Lazard (SEC File No. 801-6568).
C-20
<PAGE> 158
(i) Information for the Subadviser of the Nationwide Small Cap Value
Fund II
(1) Villanova Value Investors, LLC is in the process of being
formed. Information required by this item will be added in a
subsequent post-effective amendment.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) See Item 26 above.
(b) Nationwide Advisory Services, Inc.
<TABLE>
<CAPTION>
Position with Position with
Name Business Address Underwriter Registrant
- ---- -------------- -------------- -------------
<S> <C> <C> <C>
Dimon R. McFerson One Nationwide Plaza Chairman and CEO Chairman of Board of
Columbus OH 43215 Trustees
Joseph J. Gasper One Nationwide Plaza President and Director Vice Chairman of
Columbus OH 43215 of Trustees
Robert A. Oakley One Nationwide Plaza Exec. VP - Chief Financial N/A
Columbus OH 43215 Officer and Director
Robert J. Woodward, Jr. One Nationwide Plaza Exec. VP - Chief Investment Trustee
Columbus OH 43215 Officer and Director
James F. Laird, Jr. Three Nationwide Plaza VP - General Manager Treasurer
Columbus OH 43215
Edwin P. McCausland One Nationwide Plaza Senior VP - Fixed Income Assistant Treasurer
Columbus OH 43215 Securities
Joseph P. Rath One Nationwide Plaza VP - Compliance N/A
Columbus OH 43215
William G. Goslee One Nationwide Plaza Vice President N/A
Columbus OH 43215
Susan A. Wolken Three Nationwide Plaza Director N/A
Columbus OH 43215
Dennis W. Click One Nationwide Plaza Vice President and Secretary N/A
Columbus OH 43215
Patricia J. Smith Three Nationwide Plaza Assistant Secretary Assistant Secretary
Columbus OH 43215
Elizabeth A. Davin One Nationwide Plaza Assistant Secretary Assistant Secretary
Columbus OH 43215
</TABLE>
C-21
<PAGE> 159
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
James F. Laird, Jr.
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, OH 43215
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable
C-22
<PAGE> 160
SIGNATURES
Pursuant to the requirements of the Securities Act 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 16 to this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Columbus, and State
of Ohio, on this ___________ day of December, 1999.
NATIONWIDE MUTUAL FUNDS
By: JAMES F. LAIRD, JR.
-------------------
James F. Laird, Jr., Treasurer
PURSUANT TO THE REQUIREMENT OF THE SECURITIES ACT OF 1933, THE REGISTRATION
STATEMENT OF NATIONWIDE MUTUAL FUNDS HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED ON THE THIRTIETH DAY OF NOVEMBER, 1999.
Signature & Title
- - -----------------
Principal Executive Officer
DIMON R. MCFERSON*
- -------------------
Dimon R. McFerson, Trustee and Chairman
Principal Accounting and Financial Officer
JAMES F. LAIRD, JR.
- --------------------
James F. Laird, Jr., Treasurer
JOHN C. BRYANT*
- ----------------
John C. Bryant, Trustee
C. BRENT DEVORE*
- ----------------
C. Brent Devore, Trustee
SUE A. DOODY*
- --------------
Sue A. Doody, Trustee
ROBERT M. DUNCAN*
- ------------------
Robert M. Duncan, Trustee
THOMAS J. KERR, IV*
- --------------------
Thomas J. Kerr, IV, Trustee
DOUGLAS F. KRIDLER*
- --------------------
Douglas F. Kridler, Trustee
NANCY C. THOMAS*
- -----------------
Nancy C. Thomas, Trustee
DAVID C. WETMORE*
- ------------------
David C. Wetmore, Trustee
*BY: JAMES F. LAIRD, JR.
-------------------
James F. Laird, Jr., Attorney-In Fact
<PAGE> 161
SIGNATURES
Quantitative Master Series Trust has duly caused this Post-Effective Amendment
to the Registration Statement of Nationwide Mutual Funds to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Township of
Plainsboro, and State of New Jersey, on the thirteenth day of December, 1999.
Quantitative Master Series Trust
By: TERRY K. GLENN
---------------------------------
Terry K. Glenn, President
PURSUANT TO THE REQUIREMENT OF THE SECURITIES ACT OF 1933, THE REGISTRATION
STATEMENT OF NATIONWIDE MUTUAL FUNDS HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED ON THE FIFTEENTH DAY OF OCTOBER 1999.
Signature and Title
- --------------------
Principal Executive Officer
TERRY K. GLENN
- --------------------------------------
Terry K. Glenn, Trustee and President
Principal Accounting and Financial Officer
DONALD C. BURKE*
- --------------------------------------
Donald C. Burke, Trustee and Treasurer
JACK B. SUNDERLAND*
- --------------------------------------
Jack B. Sunderland, Trustee
STEPHEN B. SWENSRUD*
- --------------------------------------
Stephen B. Swensrud, Trustee
J. THOMAS TOUCHTON*
- --------------------------------------
J. Thomas Touchton, Trustee
*BY: TERRY K. GLENN
---------------------------------
Terry K. Glenn, Attorney-In-Fact
<PAGE> 1
Exhibit (d)(1)(b)
AMENDMENT TO INVESTMENT ADVISORY AGREEMENT
EFFECTIVE AS OF September 1, 1999
This AMENDMENT is made part of the INVESTMENT ADVISORY AGREEMENT (the
"Agreement") dated as of May 9, 1998, as amended, among Nationwide Mutual Funds
(formerly, Nationwide Investing Foundation III) (the "Trust") and Nationwide
Advisory Services, Inc., an Ohio corporation (the "Adviser") and is consented to
by Villanova Mutual Fund Capital Trust, a Delaware business trust ("Villanova
MF").
WHEREAS, the Adviser wishes to transfer its mutual fund investment advisory
business to Villanova MF and is asking the Trust to agree to amend the Agreement
so that Adviser's rights and responsibilities are transferred to Villanova MF
(the "Transfer");
WHEREAS, the Trust is registered with the Securities and Exchange Commission as
an investment company under the Investment Company Act of 1940 (the "1940 Act");
WHEREAS, Villanova MF is wholly owned by Villanova Capital, Inc., a Delaware
corporation, under the majority ownership of Nationwide Financial Services,
Inc., a Delaware corporation which through its wholly owned subsidiary,
Nationwide Life Insurance Corporation, wholly owns the Adviser, and thus
Villanova MF and the Adviser are under common control;
WHEREAS, all of the persons who will serve as the directors of Villanova
Capital, Inc. immediately after the Transfer are persons who have served as
directors of the Adviser prior to the Transfer;
WHEREAS, substantially all of the persons who will serve as officers of
Villanova MF immediately after the Transfer are persons who have served as
officers of the Adviser prior to the Transfer;
WHEREAS, the personnel who perform the services required of the Adviser under
the Agreement will continue to perform the same services after the Transfer;
WHEREAS, with respect to the services provided under the Agreement, the business
and operations of Villanova MF after the Transfer will be substantially the same
as the business and operations of the Adviser prior to the Transfer;
WHEREAS, the Transfer will not result in any reduction in the nature or quality
of the services which have been provided under the Agreement by the Adviser;
WHEREAS, the Transfer in and of itself will not result in a change in the fees
or reimbursements required to be paid under the Agreement;
WHEREAS, in view of the foregoing, the Transfer should not constitute an
assignment of the Agreement within the meaning of the 1940 Act; and
WHEREAS, the Trust's Board of Trustees has approved this amendment to the
Agreement pursuant to Section 10 of the Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants set forth
herein, the parties hereby agree as follows:
<PAGE> 2
1. Effective September 1, 1999 (the "Effective Date"), the Adviser will
transfer to Villanova MF all of its rights and responsibilities under the
Agreement.
2. On the Effective Date, Villanova MF will assume such rights and
responsibilities of the Adviser, subject to the terms of the Agreement.
3. On the Effective Date, Adviser shall be relieved of all of its rights and
responsibilities under the Agreement.
4. All other provisions of the Agreement shall remain in full force and
effect.
5. The Trust represents and warrants that it possesses the requisite power and
authority to enter into and perform its obligations under this amendment.
6. The Adviser represents and warrants that it possesses the requisite power
and authority to enter into and perform its obligations under this
amendment.
7. Villanova MF represents and warrants that it possesses the requisite power
and authority to enter into and perform its obligations under this
amendment, and that it is registered with the U.S. Securities and Exchange
Commission as an investment adviser pursuant to the Investment Advisers Act
of 1940.
8. The Adviser and Villanova MF together represent and warrant that the
transfer of the Agreement will not constitute an assignment of the
Agreement within the meaning of the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to the
Agreement to be duly executed as of the day and year first written above.
NATIONWIDE ADVISORY SERVICES, INC. NATIONWIDE MUTUAL FUNDS
By: By:
------------------------------- -----------------------------------
Title: Title:
---------------------------- --------------------------------
Agreed and Consented to by:
VILLANOVA MUTUAL FUND CAPITAL TRUST
By:
---------------------------------
Title:
------------------------------
<PAGE> 1
Exhibit (d)(1)(c)
EXHIBIT A
Investment Advisory Agreement
Between Nationwide Mutual Funds and
Villanova Mutual Fund Capital Trust
Effective December __, 1999
FUNDS OF THE TRUST ADVISORY FEES
- ------------------ -------------
- --------------------------------------------------------------------------------
FOR CERTAIN NATIONWIDE EQUITY FUNDS
-----------------------------------
Nationwide Mid Cap Growth Fund 0.60% on assets up to $250 million
Nationwide Growth Fund 0.575% on assets of $250 million and
Nationwide Fund more but less than $1 billion
Nationwide Focus Fund 0.55% on assets of $1 billion and more
but less than $2 billion
0.525% on assets of $2 billion and more
but less than $5 billion
0.50% for assets of $5 billion and more
- --------------------------------------------------------------------------------
FOR CERTAIN NATIONWIDE FIXED INCOME FUNDS
-----------------------------------------
Nationwide Bond Fund 0.50% on assets up to $250 million
Nationwide Tax Free Income Fund 0.475% on assets of $250 million and
Nationwide Long-term U.S. more but less than $1 billion
Government Bond Fund 0.45% on assets of $1 billion and more
Nationwide Intermediate U.S. but less than $2 billion
Government Bond Fund 0.425% on assets of $2 billion and more
but less than $5 billion
0.40% for assets of $5 billion and more
- --------------------------------------------------------------------------------
FOR THE NATIONWIDE MONEY MARKET FUND
------------------------------------
Nationwide Money Market Fund 0.40% on assets up to $1 billion
0.38% on assets of $1 billion and
more but less than $2 billion
0.36% on assets of $2 billion and
more but less than $5 billion
0.34% for assets of $5 billion and
more
- --------------------------------------------------------------------------------
<PAGE> 2
EXHIBIT A (continued)
Investment Advisory Agreement
Between Nationwide Mutual Funds and
Villanova Mutual Fund Capital Trust
Effective December __, 1999
FUNDS OF THE TRUST ADVISORY FEES
- ------------------ -------------
- --------------------------------------------------------------------------------
FOR OTHER FUNDS
---------------
Nationwide S&P 500 0.13% on assets up to $1.5 billion
Index Fund 0.12% on assets of $1.5 billion and more but
less than $3 billion
0.11% on assets of $3 billion and more
Prestige Large Cap Value Fund 0.75% on assets up to $100 million
0.70% on assets of $100 million and more
Prestige Large Cap Growth Fund 0.80% on assets up to $150 million
0.70% on assets of $150 million and more
Prestige Small Cap Fund 0.95% on assets up to $100 million
0.80% on assets of $100 million and more
Prestige Balanced Fund 0.75% on assets up to $100 million
0.70% on assets of $100 million and more
Prestige International Fund 0.85% on assets up to $200 million
0.80% on assets of $200 million and more
Nationwide High Yield Bond Fund 0.55% on assets up to $250 million
0.525% on assets of $250 million and more but
less than $1 billion
0.50% on assets of $1 billion and more but
less than $2 billion
0.475% on assets of $2 billion and more but
less than $5 billion
0.45% for assets of $5 billion and more
Nationwide Small Cap Value 0.70% on assets up to $250 million
Fund II 0.675% on assets of $250 million and more but
less than $1 billion
0.65% on assets of $1 billion and more but
less than $2 billion
0.625% on assets of $2 billion and more but
less than $5 billion
0.60% for assets of $5 billion and more
- --------------------------------------------------------------------------------
<PAGE> 3
EXHIBIT A (continued)
Investment Advisory Agreement
Between Nationwide Mutual Funds and
Villanova Mutual Fund Capital Trust
Effective December __, 1999
FUNDS OF THE TRUST ADVISORY FEES
- ------------------ -------------
- --------------------------------------------------------------------------------
ASSET ALLOCATION FUNDS
----------------------
The Aggressive Fund 0.13% of average daily net assets
The Moderately Aggressive Fund
The Moderate Fund
The Moderately Conservative Fund
The Conservative Fund
VILLANOVA MUTUAL FUND CAPITAL TRUST NATIONWIDE MUTUAL FUNDS
By: By:
-------------------------------- -------------------------------
Title: Title:
----------------------------- ----------------------------
<PAGE> 1
Exhibit (d)(2)(b)
EXHIBIT A
Investment Advisory Agreement
Between NATIONWIDE MUTUAL FUNDS (formerly Nationwide Investing Foundation III)
And Union Bond & Trust Company
Effective December __, 1999
Funds of the Trust Advisory Fees (applicable for each Fund)
- ------------------ ----------------------------------------
Morley Capital Accumulation Fund 0.35% of the average daily net assets of
Morley Enhanced Income Fund the Fund
ADVISER
UNION BOND & TRUST COMPANY
By:
-------------------------------------
Name:
Title:
TRUST
NATIONWIDE MUTUAL FUNDS
By:
-------------------------------------
Name:
Title:
<PAGE> 1
Exhibit (d)(3)(b)(2)
AMENDMENT TO SUBADVISORY AGREEMENT
EFFECTIVE AS OF September 1, 1999
This AMENDMENT is made part of SUBADVISORY AGREEMENT (the "Agreement") dated as
of 2nd day of November, 1998 among Nationwide Mutual Funds, an Ohio business
trust (the "Trust") (formerly, Nationwide Investing Foundation III), Nationwide
Advisory Services, Inc., an Ohio corporation (the "Adviser") and Brinson
Partners, Inc., a Delaware corporation (the "Subadviser") and is consented to by
Villanova Mutual Fund Capital Trust, a Delaware business trust ("Villanova MF").
WHEREAS, the Adviser wishes to transfer its mutual fund investment advisory
business to Villanova MF and is asking the Trust and the Subadviser to agree to
amend the Agreement so that Adviser's rights and responsibilities are
transferred to Villanova MF (the "Transfer");
WHEREAS, the Trust is registered with the Securities and Exchange Commission as
an investment company under the Investment Company Act of 1940 (the "1940 Act");
WHEREAS, Villanova MF is wholly owned by Villanova Capital, Inc., a Delaware
corporation, under the majority ownership of Nationwide Financial Services,
Inc., a Delaware corporation which through its wholly owned subsidiary,
Nationwide Life Insurance Corporation, wholly owns the Adviser, and thus
Villanova MF and the Adviser are under common control;
WHEREAS, all of the persons who will serve as the directors of Villanova
Capital, Inc. immediately after the Transfer are persons who have served as
directors of the Adviser prior to the Transfer;
WHEREAS, substantially all of the persons who will serve as officers of
Villanova MF immediately after the Transfer are persons who have served as
officers of the Adviser prior to the Transfer;
WHEREAS, the personnel who perform the services required of the Adviser under
the Agreement will continue to perform the same services after the Transfer;
WHEREAS, with respect to the services provided under the Agreement, the business
and operations of Villanova MF after the Transfer will be substantially the same
as the business and operations of the Adviser prior to the Transfer;
WHEREAS, the Transfer will not result in any reduction in the nature or quality
of the services which have been provided under the Agreement by the Adviser;
WHEREAS, the Transfer in and of itself will not result in a change in the fees
or reimbursements required to be paid under the Agreement;
WHEREAS, the Transfer will not affect the business or operations of the
Subadviser, or the nature or quality of the services provided under the
Agreement by the Subadviser;
WHEREAS, in view of the foregoing, the Transfer should not constitute an
assignment of the Agreement within the meaning of the 1940 Act; and
WHEREAS, the Trust's Board of Trustees has approved this amendment to the
Agreement pursuant to Section 14 of the Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants set forth
herein, the parties hereby agree as follows:
1. Effective September 1, 1999 (the "Effective Date"), the Adviser will
transfer to Villanova MF all of its rights and responsibilities under the
Agreement, including but not limited to, such rights and responsibilities
relating to the supervision of the Subadviser's activities with respect to
the Trust's portfolios and to the obtaining of information from, and
provision of information to, the Subadviser.
<PAGE> 2
2. On the Effective Date, Villanova MF will assume such rights and
responsibilities of the Adviser, subject to the terms of the Agreement.
3. On the Effective Date, Adviser shall be relieved of all of its rights and
responsibilities under the Agreement.
4. All other provisions of the Agreement shall remain in full force and
effect.
5. The Trust represents and warrants that it possesses the requisite power and
authority to enter into and perform its obligations under this amendment.
6. The Adviser represents and warrants that it possesses the requisite power
and authority to enter into and perform its obligations under this
amendment.
7. The Subadviser represents and warrants that it possesses the requisite
power and authority to enter into and perform its obligations under this
amendment.
8. Villanova MF represents and warrants that it possesses the requisite power
and authority to enter into and perform its obligations under this
amendment, and that it is registered with the U.S. Securities and Exchange
Commission as an investment adviser pursuant to the Investment Advisers Act
of 1940.
9. The Adviser and Villanova MF together represent and warrant that the
transfer of the Agreement will not constitute an assignment of the
Agreement within the meaning of the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to the
Agreement to be duly executed as of the day and year first written above.
NATIONWIDE ADVISORY SERVICES, INC. BRINSON PARTNERS, INC.
By: By:
--------------------------------- --------------------------------
Title: Title:
------------------------------ -----------------------------
Date: Date:
------------------------------- ------------------------------
Agreed and Consented to by:
NATIONWIDE MUTUAL FUNDS VILLANOVA MUTUAL FUND CAPITAL TRUST
By: By:
--------------------------------- --------------------------------
Title: Title:
------------------------------ -----------------------------
Date: Date:
------------------------------- ------------------------------
<PAGE> 1
Exhibit (d)(3)(c)(2)
AMENDMENT TO SUBADVISORY AGREEMENT
EFFECTIVE AS OF September 1, 1999
This AMENDMENT is made part of SUBADVISORY AGREEMENT (the "Agreement") dated as
of 2nd day of November, 1998 among Nationwide Mutual Funds, an Ohio business
trust (the "Trust") (formerly, Nationwide Investing Foundation III), Nationwide
Advisory Services, Inc., an Ohio corporation (the "Adviser") and Goldman Sachs
Asset Management, a New York limited partnership (the "Subadviser") and is
consented to by Villanova Mutual Fund Capital Trust, a Delaware business trust
("Villanova MF").
WHEREAS, the Adviser wishes to transfer its mutual fund investment advisory
business to Villanova MF and is asking the Trust and the Subadviser to agree to
amend the Agreement so that Adviser's rights and responsibilities are
transferred to Villanova MF (the "Transfer");
WHEREAS, the Trust is registered with the Securities and Exchange Commission as
an investment company under the Investment Company Act of 1940 (the "1940 Act");
WHEREAS, Villanova MF is wholly owned by Villanova Capital, Inc., a Delaware
corporation, under the majority ownership of Nationwide Financial Services,
Inc., a Delaware corporation which through its wholly owned subsidiary,
Nationwide Life Insurance Corporation, wholly owns the Adviser, and thus
Villanova MF and the Adviser are under common control;
WHEREAS, all of the persons who will serve as the directors of Villanova
Capital, Inc. immediately after the Transfer are persons who have served as
directors of the Adviser prior to the Transfer;
WHEREAS, substantially all of the persons who will serve as officers of
Villanova MF immediately after the Transfer are persons who have served as
officers of the Adviser prior to the Transfer;
WHEREAS, the personnel who perform the services required of the Adviser under
the Agreement will continue to perform the same services after the Transfer;
WHEREAS, with respect to the services provided under the Agreement, the business
and operations of Villanova MF after the Transfer will be substantially the same
as the business and operations of the Adviser prior to the Transfer;
WHEREAS, the Transfer will not result in any reduction in the nature or quality
of the services which have been provided under the Agreement by the Adviser;
WHEREAS, the Transfer in and of itself will not result in a change in the fees
or reimbursements required to be paid under the Agreement;
WHEREAS, the Transfer will not affect the business or operations of the
Subadviser, or the nature or quality of the services provided under the
Agreement by the Subadviser;
WHEREAS, in view of the foregoing, the Transfer should not constitute an
assignment of the Agreement within the meaning of the 1940 Act; and
WHEREAS, the Trust's Board of Trustees has approved this amendment to the
Agreement pursuant to Section 14 of the Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants set forth
herein, the parties hereby agree as follows:
1. Effective September 1, 1999 (the "Effective Date"), the Adviser will
transfer to Villanova MF all of its rights and responsibilities under the
Agreement, including but not limited to, such rights and responsibilities
relating to the supervision of the Subadviser's activities with respect to
the Trust's portfolios and to the obtaining of information from, and
provision of information to, the Subadviser.
<PAGE> 2
2. On the Effective Date, Villanova MF will assume such rights and
responsibilities of the Adviser, subject to the terms of the Agreement.
3. On the Effective Date, Adviser shall be relieved of all of its rights and
responsibilities under the Agreement.
4. All other provisions of the Agreement shall remain in full force and
effect.
5. The Trust represents and warrants that it possesses the requisite power and
authority to enter into and perform its obligations under this amendment.
6. The Adviser represents and warrants that it possesses the requisite power
and authority to enter into and perform its obligations under this
amendment.
7. The Subadviser represents and warrants that it possesses the requisite
power and authority to enter into and perform its obligations under this
amendment.
8. Villanova MF represents and warrants that it possesses the requisite power
and authority to enter into and perform its obligations under this
amendment, and that it is registered with the U.S. Securities and Exchange
Commission as an investment adviser pursuant to the Investment Advisers Act
of 1940.
9. The Adviser and Villanova MF together represent and warrant that the
transfer of the Agreement will not constitute an assignment of the
Agreement within the meaning of the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to the
Agreement to be duly executed as of the day and year first written above.
NATIONWIDE ADVISORY SERVICES, INC. GOLDMAN SACHS ASSET MANAGEMENT
By: By:
--------------------------------- --------------------------------
Title: Title:
------------------------------ -----------------------------
Date: Date:
------------------------------- ------------------------------
Agreed and Consented to by:
NATIONWIDE MUTUAL FUNDS VILLANOVA MUTUAL FUND CAPITAL TRUST
By: By:
--------------------------------- --------------------------------
Title: Title:
------------------------------ -----------------------------
Date: Date:
------------------------------- ------------------------------
<PAGE> 1
Exhibit (d)(3)(d)(2)
AMENDMENT TO SUBADVISORY AGREEMENT
EFFECTIVE AS OF September 1, 1999
This AMENDMENT is made part of SUBADVISORY AGREEMENT (the "Agreement") dated as
of 9th day of November, 1998 among Nationwide Mutual Funds, an Ohio business
trust (the "Trust") (formerly, Nationwide Investing Foundation III), Nationwide
Advisory Services, Inc., an Ohio corporation (the "Adviser") and INVESCO
Management and Research, Inc., a Massachusetts corporation (the "Subadviser")
and is consented to by Villanova Mutual Fund Capital Trust, a Delaware business
trust ("Villanova MF").
WHEREAS, the Adviser wishes to transfer its mutual fund investment advisory
business to Villanova MF and is asking the Trust and the Subadviser to agree to
amend the Agreement so that Adviser's rights and responsibilities are
transferred to Villanova MF (the "Transfer");
WHEREAS, the Trust is registered with the Securities and Exchange Commission as
an investment company under the Investment Company Act of 1940 (the "1940 Act");
WHEREAS, Villanova MF is wholly owned by Villanova Capital, Inc., a Delaware
corporation, under the majority ownership of Nationwide Financial Services,
Inc., a Delaware corporation which through its wholly owned subsidiary,
Nationwide Life Insurance Corporation, wholly owns the Adviser, and thus
Villanova MF and the Adviser are under common control;
WHEREAS, all of the persons who will serve as the directors of Villanova
Capital, Inc. immediately after the Transfer are persons who have served as
directors of the Adviser prior to the Transfer;
WHEREAS, substantially all of the persons who will serve as officers of
Villanova MF immediately after the Transfer are persons who have served as
officers of the Adviser prior to the Transfer;
WHEREAS, the personnel who perform the services required of the Adviser under
the Agreement will continue to perform the same services after the Transfer;
WHEREAS, with respect to the services provided under the Agreement, the business
and operations of Villanova MF after the Transfer will be substantially the same
as the business and operations of the Adviser prior to the Transfer;
WHEREAS, the Transfer will not result in any reduction in the nature or quality
of the services which have been provided under the Agreement by the Adviser;
WHEREAS, the Transfer in and of itself will not result in a change in the fees
or reimbursements required to be paid under the Agreement;
WHEREAS, the Transfer will not affect the business or operations of the
Subadviser, or the nature or quality of the services provided under the
Agreement by the Subadviser;
WHEREAS, in view of the foregoing, the Transfer should not constitute an
assignment of the Agreement within the meaning of the 1940 Act; and
WHEREAS, the Trust's Board of Trustees has approved this amendment to the
Agreement pursuant to Section 14 of the Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants set forth
herein, the parties hereby agree as follows:
1. Effective September 1, 1999 (the "Effective Date"), the Adviser will
transfer to Villanova MF all of its rights and responsibilities under the
Agreement, including but not limited to, such rights and
<PAGE> 2
responsibilities relating to the supervision of the Subadviser's activities with
respect to the Trust's portfolios and to the obtaining of information from, and
provision of information to, the Subadviser.
2. On the Effective Date, Villanova MF will assume such rights and
responsibilities of the Adviser, subject to the terms of the Agreement.
3. On the Effective Date, Adviser shall be relieved of all of its rights and
responsibilities under the Agreement.
4. All other provisions of the Agreement shall remain in full force and
effect.
5. The Trust represents and warrants that it possesses the requisite power and
authority to enter into and perform its obligations under this amendment.
6. The Adviser represents and warrants that it possesses the requisite power
and authority to enter into and perform its obligations under this
amendment.
7. The Subadviser represents and warrants that it possesses the requisite
power and authority to enter into and perform its obligations under this
amendment.
8. Villanova MF represents and warrants that it possesses the requisite power
and authority to enter into and perform its obligations under this
amendment, and that it is registered with the U.S. Securities and Exchange
Commission as an investment adviser pursuant to the Investment Advisers Act
of 1940.
9. The Adviser and Villanova MF together represent and warrant that the
transfer of the Agreement will not constitute an assignment of the
Agreement within the meaning of the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to the
Agreement to be duly executed as of the day and year first written above.
NATIONWIDE ADVISORY SERVICES, INC. INVESCO MANAGEMENT AND RESEARCH, INC.
By: By:
-------------------------------- -------------------------------------
Title: Title:
----------------------------- ----------------------------------
Date: Date:
------------------------------ -----------------------------------
Agreed and Consented to by:
NATIONWIDE MUTUAL FUNDS VILLANOVA MUTUAL FUND CAPITAL TRUST
By: By:
-------------------------------- -------------------------------------
Title: Title:
----------------------------- ----------------------------------
Date: Date:
------------------------------ -----------------------------------
<PAGE> 1
Exhibit (d)(3)(e)(2)
AMENDMENT TO SUBADVISORY AGREEMENT
EFFECTIVE AS OF September 1, 1999
This AMENDMENT is made part of SUBADVISORY AGREEMENT (the "Agreement") dated as
of 2nd day of November, 1998 among Nationwide Mutual Funds, an Ohio business
trust (the "Trust") (formerly, Nationwide Investing Foundation III), Nationwide
Advisory Services, Inc., an Ohio corporation (the "Adviser") and Lazard Asset
Management, a division of Lazard Freres & Co., LLC, a New York limited liability
company (the "Subadviser") and is consented to by Villanova Mutual Fund Capital
Trust, a Delaware business trust ("Villanova MF").
WHEREAS, the Adviser wishes to transfer its mutual fund investment advisory
business to Villanova MF and is asking the Trust and the Subadviser to agree to
amend the Agreement so that Adviser's rights and responsibilities are
transferred to Villanova MF (the "Transfer");
WHEREAS, the Trust is registered with the Securities and Exchange Commission as
an investment company under the Investment Company Act of 1940 (the "1940 Act");
WHEREAS, Villanova MF is wholly owned by Villanova Capital, Inc., a Delaware
corporation, under the majority ownership of Nationwide Financial Services,
Inc., a Delaware corporation which through its wholly owned subsidiary,
Nationwide Life Insurance Corporation, wholly owns the Adviser, and thus
Villanova MF and the Adviser are under common control;
WHEREAS, all of the persons who will serve as the directors of Villanova
Capital, Inc. immediately after the Transfer are persons who have served as
directors of the Adviser prior to the Transfer;
WHEREAS, substantially all of the persons who will serve as officers of
Villanova MF immediately after the Transfer are persons who have served as
officers of the Adviser prior to the Transfer;
WHEREAS, the personnel who perform the services required of the Adviser under
the Agreement will continue to perform the same services after the Transfer;
WHEREAS, with respect to the services provided under the Agreement, the business
and operations of Villanova MF after the Transfer will be substantially the same
as the business and operations of the Adviser prior to the Transfer;
WHEREAS, the Transfer will not result in any reduction in the nature or quality
of the services which have been provided under the Agreement by the Adviser;
WHEREAS, the Transfer in and of itself will not result in a change in the fees
or reimbursements required to be paid under the Agreement;
WHEREAS, the Transfer will not affect the business or operations of the
Subadviser, or the nature or quality of the services provided under the
Agreement by the Subadviser;
WHEREAS, in view of the foregoing, the Transfer should not constitute an
assignment of the Agreement within the meaning of the 1940 Act; and
WHEREAS, the Trust's Board of Trustees has approved this amendment to the
Agreement pursuant to Section 14 of the Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants set forth
herein, the parties hereby agree as follows:
1. Effective September 1, 1999 (the "Effective Date"), the Adviser will
transfer to Villanova MF all of its rights and responsibilities under the
Agreement, including but not limited to, such rights and
<PAGE> 2
responsibilities relating to the supervision of the Subadviser's activities with
respect to the Trust's portfolios and to the obtaining of information from, and
provision of information to, the Subadviser.
2. On the Effective Date, Villanova MF will assume such rights and
responsibilities of the Adviser, subject to the terms of the Agreement.
3. On the Effective Date, Adviser shall be relieved of all of its rights and
responsibilities under the Agreement.
4. All other provisions of the Agreement shall remain in full force and
effect.
5. The Trust represents and warrants that it possesses the requisite power and
authority to enter into and perform its obligations under this amendment.
6. The Adviser represents and warrants that it possesses the requisite power
and authority to enter into and perform its obligations under this
amendment.
7. The Subadviser represents and warrants that it possesses the requisite
power and authority to enter into and perform its obligations under this
amendment.
8. Villanova MF represents and warrants that it possesses the requisite power
and authority to enter into and perform its obligations under this
amendment, and that it is registered with the U.S. Securities and Exchange
Commission as an investment adviser pursuant to the Investment Advisers Act
of 1940.
9. The Adviser and Villanova MF together represent and warrant that the
transfer of the Agreement will not constitute an assignment of the
Agreement within the meaning of the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to the
Agreement to be duly executed as of the day and year first written above.
NATIONWIDE ADVISORY SERVICES, INC. LAZARD ASSET MANAGEMENT
By: By:
---------------------------------- --------------------------------
Title: Title:
------------------------------- -----------------------------
Date: Date:
-------------------------------- ------------------------------
Agreed and Consented to by:
NATIONWIDE MUTUAL FUNDS VILLANOVA MUTUAL FUND CAPITAL TRUST
By: By:
---------------------------------- --------------------------------
Title: Title:
------------------------------- -----------------------------
Date: Date:
-------------------------------- ------------------------------
<PAGE> 1
Exhibit (d)(3)(f)(2)
AMENDMENT TO SUBADVISORY AGREEMENT
EFFECTIVE AS OF September 1, 1999
This AMENDMENT is made part of SUBADVISORY AGREEMENT (the "Agreement") dated as
of 2nd day of November, 1998 among Nationwide Mutual Funds, an Ohio business
trust (the "Trust") (formerly, Nationwide Investing Foundation III), Nationwide
Advisory Services, Inc., an Ohio corporation (the "Adviser") and J.P. Morgan
Investment Management Inc., a Delaware corporation (the "Subadviser") and is
consented to by Villanova Mutual Fund Capital Trust, a Delaware business trust
("Villanova MF").
WHEREAS, the Adviser wishes to transfer its mutual fund investment advisory
business to Villanova MF and is asking the Trust and the Subadviser to agree to
amend the Agreement so that Adviser's rights and responsibilities are
transferred to Villanova MF (the "Transfer");
WHEREAS, the Trust is registered with the Securities and Exchange Commission as
an investment company under the Investment Company Act of 1940 (the "1940 Act");
WHEREAS, Villanova MF is wholly owned by Villanova Capital, Inc., a Delaware
corporation, under the majority ownership of Nationwide Financial Services,
Inc., a Delaware corporation which through its wholly owned subsidiary,
Nationwide Life Insurance Corporation, wholly owns the Adviser, and thus
Villanova MF and the Adviser are under common control;
WHEREAS, all of the persons who will serve as the directors of Villanova
Capital, Inc. immediately after the Transfer are persons who have served as
directors of the Adviser prior to the Transfer;
WHEREAS, substantially all of the persons who will serve as officers of
Villanova MF immediately after the Transfer are persons who have served as
officers of the Adviser prior to the Transfer;
WHEREAS, the personnel who perform the services required of the Adviser under
the Agreement will continue to perform the same services after the Transfer;
WHEREAS, with respect to the services provided under the Agreement, the business
and operations of Villanova MF after the Transfer will be substantially the same
as the business and operations of the Adviser prior to the Transfer;
WHEREAS, the Transfer will not result in any reduction in the nature or quality
of the services which have been provided under the Agreement by the Adviser;
WHEREAS, the Transfer in and of itself will not result in a change in the fees
or reimbursements required to be paid under the Agreement;
WHEREAS, the Transfer will not affect the business or operations of the
Subadviser, or the nature or quality of the services provided under the
Agreement by the Subadviser;
WHEREAS, in view of the foregoing, the Transfer should not constitute an
assignment of the Agreement within the meaning of the 1940 Act; and
WHEREAS, the Trust's Board of Trustees has approved this amendment to the
Agreement pursuant to Section 14 of the Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants set forth
herein, the parties hereby agree as follows:
1. Effective September 1, 1999 (the "Effective Date"), the Adviser will
transfer to Villanova MF all of its rights and responsibilities under the
Agreement, including but not limited to, such rights and responsibilities
relating to the supervision of the Subadviser's activities with respect to
the Trust's portfolios and to the obtaining of information from, and
provision of information to, the Subadviser.
<PAGE> 2
2. On the Effective Date, Villanova MF will assume such rights and
responsibilities of the Adviser, subject to the terms of the Agreement.
3. On the Effective Date, Adviser shall be relieved of all of its rights and
responsibilities under the Agreement.
4. All other provisions of the Agreement shall remain in full force and
effect.
5. The Trust represents and warrants that it possesses the requisite power and
authority to enter into and perform its obligations under this amendment.
6. The Adviser represents and warrants that it possesses the requisite power
and authority to enter into and perform its obligations under this
amendment.
7. The Subadviser represents and warrants that it possesses the requisite
power and authority to enter into and perform its obligations under this
amendment.
8. Villanova MF represents and warrants that it possesses the requisite power
and authority to enter into and perform its obligations under this
amendment, and that it is registered with the U.S. Securities and Exchange
Commission as an investment adviser pursuant to the Investment Advisers Act
of 1940.
9. The Adviser and Villanova MF together represent and warrant that the
transfer of the Agreement will not constitute an assignment of the
Agreement within the meaning of the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to the
Agreement to be duly executed as of the day and year first written above.
NATIONWIDE ADVISORY SERVICES, INC. J.P. MORGAN INVESTMENT MANAGEMENT INC.
By: By:
-------------------------------- -------------------------------------
Title: Title:
----------------------------- ----------------------------------
Date: Date:
------------------------------ -----------------------------------
Agreed and Consented to by:
NATIONWIDE MUTUAL FUNDS VILLANOVA MUTUAL FUND CAPITAL TRUST
By: By:
-------------------------------- -------------------------------------
Title: Title:
----------------------------- ----------------------------------
Date: Date:
------------------------------ -----------------------------------
<PAGE> 1
Exhibit (h)(1)(b)
AMENDMENT TO FUND ADMINISTRATION AGREEMENT
EFFECTIVE AS OF September 1, 1999
This AMENDMENT is made part of FUND ADMINISTRATION AGREEMENT (the "Agreement")
dated as of May 9, 1998, as amended, between Nationwide Advisory Services, Inc.
(the "Administrator") and Nationwide Mutual Funds (the "Trust") and is consented
to by Villanova SA Capital Trust ("Villanova SA").
WHEREAS, the Administrator wishes to transfer its fund administration business
to Villanova SA and is asking the Trust to amend the Agreement so that the
Administrator's rights and responsibilities are transferred to Villanova SA (the
"Transfer");
WHEREAS, the Transfer will not result in any reduction in the nature or quality
of the services which have been provided under the Agreement by the
Administrator;
WHEREAS, the Transfer in and of itself will not result in a change in the fees
or reimbursements required to be paid under the Agreement;
WHEREAS, the Trust's Board of Trustees has approved this amendment to the
Agreement pursuant to Section 7 of the Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants set forth
herein, the parties hereby agree as follows:
1. Effective September 1, 1999 (the "Effective Date"), the Administrator will
assign all of its rights and responsibilities under the Agreement to
Villanova SA.
2. On the Effective Date, Villanova SA will assume such rights and
responsibilities, subject to the terms of the Agreement.
3. On the Effective Date, Administrator shall be relieved of all of its rights
and responsibilities under the Agreement.
4. Section 2, Services and Duties, is hereby amended to add the following as
the last paragraph of such section:
Villanova SA is authorized to appoint one or more qualified
subadministrators to provide the Trust with certain Administrative
Services provided under the Agreement.
5. All other provisions of the Agreement shall remain in full force and
effect.
6. Villanova SA represents and warrants that it possesses the requisite power
and authority to enter into and perform its obligations under this
amendment.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be duly
executed as of the day and year first written above.
NATIONWIDE ADVISORY SERVICES, INC. NATIONWIDE MUTUAL FUNDS
By: By:
----------------------------------- --------------------------------
Title: Title:
-------------------------------- -----------------------------
Agreed and Consented to by:
VILLANOVA MUTUAL FUND CAPITAL TRUST
By:
-----------------------------------
Title:
--------------------------------
<PAGE> 1
Exhibit (h)(1)(c)
AMENDED EXHIBIT A
NATIONWIDE MUTUAL FUNDS
Fund Administration Agreement
<TABLE>
<CAPTION>
Funds of the Trust Fund Administration Fees
- ------------------ ------------------------
<S> <C>
Nationwide Fund For each of the Nationwide Funds
Nationwide Growth Fund and the Morley Capital Accumulation
Nationwide Mid Cap Growth Fund Fund,
Nationwide Bond Fund 0.07% on assets up to $250 million
Nationwide Tax-Free Income Fund 0.05% on assets of $250 million and
Nationwide Long-Term U.S. Government Bond Fund more but less than $1 billion
Nationwide Intermediate U.S. Government Bond Fund 0.04% on assets of $1 billion and more
Nationwide Money Market Fund
Nationwide Small Cap Value Fund II*
Nationwide High Yield Bond Fund*
Nationwide Focus Fund*
Morley Capital Accumulation Fund**
Morley Enhanced Income Fund*
Nationwide S&P 500 Stock Index Fund For the S&P 500 Index Fund,
(the "S&P 500 Index") 0.05% on assets up to $1 billion
0.04% on assets of $1 billion and more
Prestige Large Cap Value Fund For each of the Prestige Funds,*
Prestige Large Growth Fund 0.10% on assets up to $250 million
Prestige Small Cap Fund 0.06% on assets of $250 million
Prestige Balanced Fund and more but less than $1 billion
Prestige International Fund 0.04% on assets of $1 billion and more
(the "Prestige Funds")
The Aggressive Fund For the Asset Allocation Funds,*
The Moderately Aggressive Fund 0.07% on assets up to $250 million
The Moderate Fund 0.05% on assets of $250 million and more
The Moderately Conservative Fund
The Conservative Fund
(the "Asset Allocation Funds")
Nationwide Small Cap Index Fund*** 0.27% on assets up to $250 million
0.24% on assets of $250 million and more
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Nationwide International Index Fund*** 0.34% on assets up to $250 million
0.31% on assets of $250 million and
more
Nationwide Bond Index Fund*** 0.29% on assets up to $250 million
Nationwide Mid Cap Index Fund II*** 0.26% on assets up of $250 million
and more
*Subject to a $75,000 annual minimum fee.
**Subject to a $50,000 annual minimum fee.
*** Subject to a $75,000 annual minimum fee.
</TABLE>
NATIONWIDE MUTUAL FUNDS
By:
---------------------------------
Title:
------------------------------
VILLANOVA SA CAPITAL TRUST
By:
---------------------------------
Title:
------------------------------
